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.

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

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
    Yvette Cooper: We can't lose the election. There's too much on the line

    Yvette Cooper: We can't lose the election. There's too much on the line

    The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
    A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

    It's not easy being Green

    After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
    Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

    Gorillas nearly missed

    BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
    Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

    The Downton Abbey effect

    Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
    China's wild panda numbers have increased by 17% since 2003, new census reveals

    China's wild panda numbers on the up

    New census reveals 17% since 2003