Flexible home loans don't fit all profiles

Borrowers love them, but experts say they only work if you're wealthy. Melanie Bien hears both views

Offset deals may be all the rage in the mortgage market - but two leading brokers argue that they aren't suitable for most borrowers.

Offset deals may be all the rage in the mortgage market - but two leading brokers argue that they aren't suitable for most borrowers.

Despite having been introduced just six years ago, offsets account for one in 10 of all mortgages, partly because rates have improved so dramatically during the past 12 months. But The MarketPlace at Bradford & Bingley, a mortgage broker, believes that borrowers can still get a better deal by opting for the cheapest standard product and putting their savings in a high-interest account instead.

"The offset market has continued to proliferate in the past year, with new and competitive products arriving on the scene," says David Bitner, head of product operations at The MarketPlace. "However, these deals are still not right for the majority of borrowers, who just do not have the level of savings to make them work."

Tom Bland, associate at broker Savills Private Finance, agrees that borrowers may be able to find a better deal elsewhere. "Although it is correct that offset mortgages can help in paying off your loan early, I would hate for the general public to be of the opinion that these are the only mortgages where this is possible.

"Homeowners should take out the most suitable mortgage for their circumstances."

Borrowers opt for offset deals because they enable them to link any number of savings accounts and/or a current account to their mortgage. This means you pay less interest: if the outstanding loan is £200,000, for example, and you have £50,000 in savings, you pay interest on only £150,000. You can also access your savings at any time.

Your monthly mortgage payments remain the same as if you didn't have an offset product, except that you are overpaying each month. So you end up saving thousands of pounds in interest because you clear your loan several years early.

However, The MarketPlace's Mr Bitner argues that, to make an offset deal worthwhile, lower-rate taxpayers need at least 40 per cent of their total mortgage balance in savings (or 20 per cent if you are a higher-rate taxpayer). If you don't have this level of savings, he reckons you would be better off opting for the cheapest mortgage and sticking your savings in a regular account.

"Many mainstream deals offer more attractive rates with flexible features such as overpayments and payment holidays," he says. "Borrowers are much better off taking a market-leading product and going offset later in their mortgage life when they have the level of savings to make it work."

However, David Hollingworth at mortgage broker London & Country thinks that if someone has as much as 40 per cent of their mortgage saved up, they would be best advised to put this towards the deposit on the property. "I would take a chunk off the mortgage rather than leave savings in an offset account," he says.

Although some brokers aren't keen on offset deals, Rik Kendall, spokesman for Newcastle building society, says offset mortgages now account for a third of its total lending. He believes their flexible features are what make them so popular with borrowers.

"People especially like the family feature, which allows parents to help their kids out with a mortgage [by offsetting their savings against the child's home loan] while keeping control of their money," he says. "We offer a choice of fixed and variable rates, with our five-year fix currently at 5.65 per cent, which isn't bad at all.

"There are also tax advantages because you don't pay tax on your savings via an offset account, which is very attractive to customers."

Even if borrowers do end up paying a higher rate of interest, many believe the flexibility of offset deals outweighs the disadvantages. Damian Roscoe and his partner Joanne Przybylak took out an offset mortgage with Abbey when they bought their home in High Wycombe, Buckinghamshire, last November. The couple have a 16-month-old daughter, Annabelle, and are expecting another baby at the end of October.

"We did shop around and would probably have got a better rate if we'd opted for a straightforward fixed rate," says Mr Roscoe. "But we like the fact that we can overpay when we've got spare money and then pay less towards the mortgage during those months when we've got other expenses to consider.

"For example, we have to do a lot of work on the property and paid less towards the mortgage when we had to have the ceilings replastered. We are also off on holiday next month so we'll make just the minimum mortgage payment during August. And when the new baby arrives at the end of October we will probably pay less for a further couple of months."

According to London & Country, the most competitive offset deal currently available is from Intelligent Finance, although its 1.6 per cent discount lasts only three months. The initial pay rate is 4.1 per cent.

London & Country is offering a stepped tracker with a current rate of 4.5 per cent for the first three months, rising to 4.74 per cent for 15 months and 5.25 per cent for 18 months after that.

If you want an offset mortgage that tracks the base rate, both Abbey and Universal are charging this plus 0.5 per cent for the term of their deals, giving a current pay rate of 5 per cent.

None of these deals carries any redemption penalties.