Do the sums if you subtract your savings from a home loan

Less to repay, flexible features and tax breaks: these deals have much to offer homeowners. Esther Shaw looks for the catch
Click to follow
The Independent Online

Are we really a nation of financial dunces? Recent research from the online bank Egg suggested the national financial IQ was less than half (56) of a possible top score of 120. But a growing number of Britons are showing their financial savvy by choosing offset mortgages that let borrowers use their savings to slash the overall cost of a home loan.

Are we really a nation of financial dunces? Recent research from the online bank Egg suggested the national financial IQ was less than half (56) of a possible top score of 120. But a growing number of Britons are showing their financial savvy by choosing offset mortgages that let borrowers use their savings to slash the overall cost of a home loan.

Where once offset deals were far more costly than a discounted variable-rate or fixed mortgage, their popularity with borrowers has led to intense competition in the market.

The appeal of offset home loans is simple: you can link any number of savings accounts - and your current account - to the amount you owe and "offset" this total against the size of your mortgage. Interest is paid only on the difference between your assets and your debt.

So, if your mortgage is for £220,000 and you have £20,000 in savings, you'll pay interest only on £200,000.

While your monthly repayments usually remain the same, paying less interest over time means you should be able to pay off the mortgage sooner - and for less. And although you won't be earning interest on your savings, linking them to an offset deal means you don't pay tax on them either.

Figures from the online bank Intelligent Finance (IF) show that a borrower with a 25-year £150,000 repayment mortgage who has £10,000 in savings and current accounts could save more than £20,300 over the term in interest repayments.

Moreover, offset deals offer more flexible features than many conventional loans - including the ability to overpay, underpay and take payment holidays. They are particularly useful for people with unpredictable incomes, such as the self-employed, giving them access to money when they need it.

John Mackay from Edinburgh took out an offset mortgage with Intelligent Finance (IF) to help fund renovations on a property that he and his wife, Sandra, recently purchased in Linlithgow. "We bought a listed building that has not had any work done on it for 20 years," he says. "We chose an offset mortgage as it was the most cost-effective and flexible option."

IF's offset deal has a 24-month discount at 5.49 per cent which then moves to a variable rate of 5.95 per cent.

"The good thing is we can get access to the cash we need to fund the new kitchen and bathroom," Mr Mackay continues. "Plus, we benefit from the tax relief [on savings], making it a good deal all round."

Different offsetting schemes operate in different ways, says Simon Tyler of the broker Chase de Vere Mortgage Management.

For example, with a One Account mortgage, you transfer all your earnings, savings and debts to one account. The assets are offset against the home loan.

By contrast, IF lets you keep your savings account, current account, credit card and loan debts separate so you can see how much is in each. The bank's computer links them all together in order to calculate the amount of interest payable.

With offset mortgages offering so many benefits, where's the catch? Interest rates on these home loans are generally higher than on standard mortgages - although you can find some competitively priced deals if you look for them.

"You pay for the flexibility of being able to pay the loan off in full at any time without penalty, and for [the lender having to make] daily interest calculations," says Simon Jones of the broker Savills Private Finance.

Newcastle building society has a good deal - offering a rate of 4.99 per cent for six months, reverting to 5.25 per cent for the life of the loan, says Mr Tyler.

But many such short-term discounts on offset loans need careful analysis because they come with tie-in periods or revert to a much higher rate when the discount comes to an end, adds Mr Tyler.

For this reason, if you're considering an offset deal, it's crucial to ask a broker or lender to do the sums for you to work out if it's a move worth making. Although any savings will in theory reduce the amount you repay, the higher rate of interest, combined with possible tie-in periods and fees if you want to exit from the deal, could leave you out of pocket.

"Unless you've got at least several thousand pounds in savings, there is little benefit from an offset deal - especially if you are a basic-rate taxpayer [because you won't be getting as much tax relief on your savings]," says Mr Jones.

"Offset deals are best suited to higher-rate taxpayers with substantial savings."

If you just want the cheapest mortgage deal rather than flexible features, opt for a standard, fixed or discounted rate, he adds.

David Bitner from mortgage adviser Bradford & Bingley says borrowers need 10 to 15 per cent of the mortgage balance in savings to make an offset product suitable. "The more savings you have, the more worthwhile it is," he adds.

However, some lenders insist there is no better deal than an offset mortgage.

"It's all pros and no cons," says Alan Dring, spokesman for Standard Life Bank. "You get the flexibility of a tailor-made arrangement - and you reduce your mortgage on a daily basis while at the same time making the most of your savings.

"Many people earning unattractive rates in a building society account could benefit significantly by moving to offset."

Looking for credit card or current account deals? Search here

Comments