Flexible loans can save you money
Offset mortgages can be cheaper for some borrowers, but they won't suit everyone, says Stephen Pritchard
Wednesday 06 July 2005
Recent research carried out by pollsters ICM Research, on behalf of Intelligent Finance, suggested that borrowers in the UK pay as much as £2bn a year too much in mortgage interest. By taking out a flexible or "offset" mortgage, homebuyers could save thousands of pounds in interest, and pay off their home loans earlier.
Despite the appeal of paying back the mortgage ahead of time, only around 10 per cent of homebuyers currently opt for offset mortgages. Offsets work by setting money in linked savings accounts against the mortgage sum, with the borrower only paying interest on the balance. As long as the borrower keeps money in the linked savings accounts and does not take payment holidays, offsetting will enable them to pay back their loans early.
Take-up of flexible and offset mortgages is on the increase: Abbey, for example, says that 14 per cent of its borrowers opted for a flexible mortgage in the first five months of this year. That is double the rate in 2004. But across the industry, the majority of homebuyers still opt for a conventional mortgage, even though an offset mortgage should save money.
Possible explanations for this include the cost and the complexity of offset mortgages. Although Intelligent Finance claims that 44 per cent of adults are familiar with the principle behind offsetting, and that awareness has grown over the last few years, mortgage brokers say that few clients ask for offset home loans.
Cost is a big deterrent for many mortgage applicants, suggests David Hollingworth, a director at brokers London & Country. "Whilst an offset mortgage will pay off the loan more quickly, it does depend on having a significant proportion of the mortgage sum in savings," he says. "An offset mortgage can cost 0.75 per cent to 1 per cent more than a conventional mortgage, so you have to have a fair amount in savings to make it work."
The simplest and the most common offset account is a flexible mortgage - allowing under and over payments - with a linked savings account. The balance in the savings account is offset against the mortgage sum, cutting the total bill. Abbey's Flexible Plus mortgages, for example, can be set up this way.
More sophisticated offset loans link other accounts, in particular a current account, to the mortgage. This makes the buyer's money work harder, as any money in the current account reduces the mortgage interest, even if the money is only there for a day. Banks such the Clydesdale and the Norwich and Peterborough have such accounts.
Taking the idea one step further is the One Account, from Royal Bank of Scotland. This puts all funds into one single pot, including savings and current accounts. This is the purest form of an offset mortgage, but not all buyers like having their funds pooled in this way. There are other nuances to offsetting, too, such as Intelligent Finance's facility to link Isas to their offset mortgage account.
This complexity does give homebuyers choice, but there are also some drawbacks. Running an offset mortgage with a current account only works well for buyers who keep their accounts in credit. The more money in the current account, the greater the interest savings. Intelligent Finance calculates that an offset mortgage is only really worthwhile for homebuyers who borrow 85 per cent or less of their property's value, and pass at least £1,500 a month through their current accounts.
Nor do some buyers like the idea of tying up savings they have set aside for contingencies in a mortgage. "Most people like to have a rainy-day fund, but they almost have a fear of using that money to pay back the mortgage, even though it would be a wise move to make," says London & Country's Hollingworth.
An offset mortgage does, however, allow homeowners to take money out of the account without further form-filling or credit checks.
As a result, buyers who do opt for offsets tend to be those with quite complex and sophisticated financial arrangements. This includes buyers who have variable levels of income, perhaps including bonuses, and the self-employed, who may keep relatively large sums of money in savings accounts as a provision against future tax bills.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Shock poll shows voters believe Ukip is to the left of the Tories
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
iJobs Money & Business
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens