Up to 1m borrowers with offset mortgages have been warned that today’s low interest rates could in some cases negate the benefits of setting their savings against their loans.

With offset mortgages, borrowers are not credited with any interest on their savings, but don’t have to pay any interest on the equivalent amount of their outstanding mortgages.

For example, if a borrower has a £200,000 mortgage and £80,000 in savings, he or she will pay interest only on the difference — £120,000 — enabling him or her to reduce the mortgage term by several years.

This type of mortgage is particularly popular with higher-rate taxpayers, who may not be earning any interest on their savings but don’t have to pay tax on them either.

However, homeowners who took out highly competitive tracker offset mortgages a year or more ago may find that they are now paying such low mortgage rates that they might be better off moving their savings to a separate account.

For example, 18 months ago Intelligent Finance offered an offset tracker at 0.26% below Bank rate, or just 1.24% following Thursday’s reduction.

Ray Boulger of John Charcol, the broker, said: “These borrowers would be better off investing in a separate savings account now, such as ING Direct’s account paying 5% gross interest.

“They would still be better off even if savings rates go down to 4%, as even higher-rate taxpayers will be earning 2.4% interest while paying less than 2% on their mortgage.”

Based on a £200,000 mortgage and £50,000 in savings, a 40% taxpayer with an offset rate at 1.24% is £880 a year better off putting the £50,000 into a separate savings account rather than into the linked offset savings account until his or her current deal finishes and a new one needs to be decided on.

Based on a £500,000 mortgage and £100,000 in savings, a 40% taxpayer with an offset rate at 1.24% is £3,200 better off a year putting the £100,000 into a separate savings account rather than into the linked offset savings account until their current deal finishes, when they will need to reassess.

It is worth bearing in mind that 5% savings rates are unlikely to be around for long given Thursday’s rate cut. Also, the ING Direct savings rate includes a 2.17% bonus for a year.

For new borrowers who have substantial savings and are higher-rate taxpayers, experts say it is still worth taking out an offset mortgage.

One of the best offset rates for new borrowers is a lifetime tracker deal from First Direct at 1.89% above Bank rate, giving a current payable rate of 3.39%. This deal has a £799 arrangement fee and is available for mortgages up to 80% of the property value.

Using the offset arrangement on a £200,000 mortgage at First Direct’s 3.39% rate with savings of £50,000, higher-rate taxpayer couples would be £195 a year better off than if they invested in a separate savings account paying 5%.

However, if one of the borrowers does not pay tax, then an offset mortgage is much less attractive, as he or she could earn £2,500 in interest based on the same £50,000 savings pot at 5%, compared to cutting the interest on their homeloan by £1,695.

Boulger said: “The general advice for anyone with an offset mortgage on a

sub-Bank rate tracker, or even on a rate only a little above Bank rate, is to switch any funds in the linked offset savings account to a new savings account with ING at 5% until their initial mortgage deal finishes — or ING cuts its rate significantly — when it may make sense to switch the savings back to the offset linked savings account.

“After a year it will certainly be necessary to either start using the offset savings facility again or switch to another savings provider, as without its huge 2.17% one-year bonus the ING rate is uncompetitive.”

How to pick the moment

* Take the amount in savings you have and multiply that by the potential savings rate you could earn in a separate account. So £50,000 x 5% is £2,500 gross.

* Next deduct how much tax you would pay on that interest (if 40% £1,000 is taken off, so the total is £1,500).

* Then take the savings pot again and multiply it by the mortgage rate to find out by how much you could cut the interest on the home loan over the year. So, if you are paying a mortgage rate of 1.24%, then £50,000 x 1.24% = £620.

* If you would earn more interest in the savings account than the amount of interest you could reduce on the mortgage, then it is worth moving.