A win-win situation for borrowers: Loans linked to your current account or savings are an attractive option

Linking your mortgage to your current account or savings could mean cutting the cost of your mortgage. That's especially true at the moment when savings rates are so low. If you offset your savings against your outstanding mortgage, you'll effectively be earning interest at whatever your mortgage rate is. And that's likely to be much higher than you can earn on your savings at present.

"With the base rate at 0.5 per cent, savings rates are low, so now is a good time for many homeowners with savings to consider offsetting," says Nick Scarrett, head of pensions and investments at Fair Investment Company. "At the moment, many people will be paying more interest on their mortgage than they are earning on their savings, and this doesn't make financial sense."

Offset mortgages link the balance of your mortgage to the cash you hold in savings or current accounts. It lets you "offset" the credit balance in your other accounts against the mortgage balance, so interest is only paid on the difference.

The effective rate of return you get on your savings is the mortgage rate you're being charged, and there is no tax to pay, so the return will often be much better than that currently available on a savings account. For example, a basic-rate taxpayer offsetting against a mortgage charged at 3.5 per cent would need to earn 4.38 per cent gross on a standard savings account to get the same effective return. A higher-rate taxpayer would need to earn a gross savings rate of 5.83 per cent.

David Black, banking specialist at the analysts Defaqto, says: "Offset mortgages can work extremely well for higher-rate taxpayers who have a mortgage and savings. Offset mortgages effectively offer tax-free interest on savings at the same rate as the mortgage."

He calculates that a savings pot of £20,000 would, at the average offset mortgage rate of 4.25 per cent, knock £850 off the annual mortgage interest on a mortgage higher than £20,000. To earn that amount on a taxable savings account, a higher-rate taxpayer would need to find a savings account paying a gross interest rate of 7.08 per cent.

Black says: "Others who could benefit from an offset mortgage include the self-employed, buy-to-let landlords, anyone who receives a fairly substantial part of their income in the form of an annual bonus or even those paying school fees. In these instances, an offset mortgage can provide the borrower with the flexibility required to assist with irregular income streams or outgoings."

John Hughes of the Britannia agrees. "Offset mortgages are a good option for people who earn bonuses or get paid by commission as they might be able to pay a big deposit on their savings or current account every so often, offsetting their mortgage even more. Offset mortgages vary from lender to lender, but as a rule they are quite flexible, offering the opportunity to overpay, underpay, pay in lump sums and even repay your mortgage early. If you are running low on cash, you can even take a payment holiday."

Such flexibility can make an offset look very attractive, but borrowers should look at the small print of deals to ensure they can use the mortgage the way they need, warns Black. "There are some significant differences in the features offered by the 160 different offset mortgages, so consumers should think about what features are important to them when doing their research."

Paul Kaye, general manager of sales at the Leeds Building Society says flexibility is one reason why more borrowers are beginning to choose offset mortgages. "Because savings are kept in a completely separate account, there is no need for a fundamental reorganisation of finances, and customers have unlimited access to them at any time, providing great flexibility and peace of mind."

And flexibility is becoming increasingly important to homeowners, according to research published in May by Lloyds TSB. Some 68 per cent of mortgage borrowers said flexibility is important, and 40 per cent said it was "very important". Stephen Noakes, head of mortgages at Lloyds TSB, says: "Our research shows that customers want to have a greater degree of control over how much they pay, and have the opportunity to flex payments dependent on economic conditions."

Offset mortgages are often seen as being more expensive than standard deals. The headline low fixed or tracker rates borrowers may be offered with a non-offset mortgage are often not made available to those who choose an offset deal. That shouldn't stop borrowers considering them, says adviser Drew Wotherspoon of John Charcol. "Generally, for borrowers with good levels of savings, offsets present a viable option, especially when obtaining anything more than a token return on a savings account is a labour of herculean proportions.

"The premium you have to pay for an offset varies from lender to lender, so if you can find one that doesn't load the rate for the privilege then it makes sense to have the option even if you do not use it to a great level. The general rule of thumb is that if you use an offset correctly you can save money on your mortgage, which will also help you pay it back quicker. Yet borrowers should seek specific advice about whether an offset is the best solution for them."

Using savings to offset against a mortgage rather than using the cash to make overpayments can make sense, according to David Hollingworth of brokers London & Country. "One of the benefits of offsetting rather than overpaying is that you retain easy access to the savings in case they are needed. That means that funds earmarked for other purposes like a tax bill or a holiday can be put to good use until they're required."

He says offsetting savings can offer a win-win situation, as borrowers look to take advantage of the low base rate and eat into their mortgage, and savers become disillusioned with the rates on offer and seek a better return. "In addition, offsetting and maintaining the monthly payment at the usual level means there is a slight overpayment each month, and the mortgage is therefore eroded more quickly. With concerns over rates rising in the future, reducing the capital balance now should be easier and help ease some of the pain for when rates do lift."

Life and Style
life
Arts and Entertainment
Diana from the Great British Bake Off 2014
tvProducers confirm contestant left because of illness
News
Brad Pitt and Angelina Jolie reportedly married in secret on Saturday
peopleSpokesperson for couple confirms they tied the knot on Saturday after almost a decade together
Life and Style
Chen Mao recovers in BK Hospital, Seoul
health
PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Client-Side web developer (JQuery, Javascript, UI, JMX, FIX)

    Negotiable: Harrington Starr: Client-Side web developer (JQuery, Javascript, U...

    Structured Finance

    Highly Competitive Salary: Austen Lloyd: CITY - An excellent new instruction w...

    SQL Server Developer

    £500 per day: Harrington Starr: SQL Server Developer SQL, PHP, C#, Real Time,...

    C#.NET Developer

    £600 per day: Harrington Starr: C#.NET Developer C#, Win Forms, WPF, WCF, MVVM...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone
    Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

    What is the appeal of Twitch?

    Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
    Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

    How bosses are making us work harder

    As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff