Discover the joy of offsets

A flexible mortgage that allows you to be prudent or spendthrift from month to month? Christopher Browne finds out more
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The Independent Online

Heather Scott likes to put her perks before her pensions. She may work for a finance company, but she's happier spending her cash than stashing it. "I've never been much good at saving. As soon as I have some money to spare I splash out on furnishings, luxuries and computer games for my son Blair."

Heather Scott likes to put her perks before her pensions. She may work for a finance company, but she's happier spending her cash than stashing it. "I've never been much good at saving. As soon as I have some money to spare I splash out on furnishings, luxuries and computer games for my son Blair."

Three years ago, she had five endowment policies to help pay off her mortgage and some loans she took out for home improvements at her home in Longniddry, East Lothian. Then along came the endowment crisis. Along with millions of other hapless policy-holders, the value of Scott's endowments dived. So she surrendered them to her lender, Standard Life.

Shortly afterwards, she also changed her job and, while doing some product research at her new workplace, stumbled on a home loan that was "just the business". It's called an offset mortgage and links any savings you may have with your home loan.

It's like a second deposit, really. But unlike the down payment, this does far more work for you. You may not get interest on your savings (and current) accounts, but it remains tax-free throughout your mortgage term and, by plopping neatly into your mortgage, lowers the size of your loan - which means less interest and - with luck - a gratifyingly short borrowing term.

Heather and her husband Brian linked their savings - the sum they raised from the endowments - with their loan on a 50:50 basis when they remortgaged their home with lender Intelligent Finance, Heather's employer. "Because our cash matched the loan, it was completely interest-free, which reduced our monthly payments by £200. As we often overpay our mortgage premiums, we will be able to clear it in less than half of its 22-year term, while I can continue to spend, spend, spend, with the added comfort of knowing we're savers too," she says.

Offsets appear in several guises. Some are fixed, some tracker, others capped and a new one gives a welcome fillip to first-time buyers. Suppose a young couple want to buy a £135,000 terraced house on the Norwich coast, from next week they can apply for Newcastle Building Society's First-Time Buyer Offset. Instead of the buyer, it's a parent or relative who does the saving, adding a sizeable chunk to offset the young pair's loan (fixed at 5.4 per cent) for five years. After that, the mortgage reverts back to the couple, who should by now be in higher-paid jobs and able to handle bigger outgoings.

One relative newcomer to the offset market is Hinckley & Rugby Building Society, which has a 4.84 per cent offset mortgage with a free valuation and no setting-up costs over any term (maximum 25 years), plus payment holidays of up to three months a year. Most offsets have two annual month-long payment holidays, which gives ideal back-up for anyone on maternity leave, changing their job, or coping with redundancy or a spell of illness.

And there is another perk, too. "If you know you are coming into money, you can even get an offset with no cash in your savings or current accounts at all," says Karen Taylor of H&R which like several others, calculates interest daily which means overpayments are applied to your account immediately. Then there's flexibility. You have instant access to your savings, so you can dip in to buy a new car if you want to, while the prudent can stash far larger lumps of cash than they could with an Isa-linked mortgage and its £3,000-a-year limit.

"The individuals most suited to offsets are the self-employed, such as barristers, who are paid large sums at different times of the year. The ideal figure for a saver is around 30 per cent of their offset mortgage. If you put in less, you may find it better to go for a fixed mortgage with a 0.5 to 1 per cent lower interest rate," says Ray Boulger of Charcol mortgage brokers.

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