Master of your own mortgage: how to save time and money

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The Independent Online

The offset mortgage marches on. Once the preserve of richer borrowers, this type of flexible home loan - which lets you set your savings against what you owe in return for lower interest repayments - is moving steadily into the mainstream.

Its progress has been helped by a shrinking difference between the rates on offset loans and those for standard mortgages, as well as greater competition between lenders.

There was just one offset deal in 1999; today there are 112, says financial analyst Moneyfacts.

Most of the UK's big lenders now offer them, while smaller rivals such as Clydesdale bank are even branching into offsets for buy-to-let properties.

"The interest rate differential between the best offset and best standard mortgages has been consistently narrowing. It now stands at between 0.2 and 0.25 per cent," says Ray Boulger of mortgage broker John Charcol. The difference used to be one percentage point, he adds.

The benefits are well documented. Say you have a £150,000 repayment mortgage at a rate of 5 per cent and £10,000 in savings. An offset deal could save you £22,187.81 and knock three years off the life of the loan, according to figures from Abbey.

Monthly repayments usually stay the same but you pay less interest over the term of the mortgage and it is paid off quicker. You won't earn interest on your savings but linking them to the loan means no tax to pay.

Offsets also offer greater flexibility than most conventional loans. You can overpay, underpay, take payment holidays and get at your savings if needed. This can be useful for borrowers with unpredictable incomes, such as the self-employed.

Cheaper loan prices also mean that borrowers no longer need to be sitting on a big nest-egg to benefit from the arrangement. Traditionally, offsets were recommended only to those with a hefty 30 per cent of their mortgage balance in savings.

"We still use a benchmark of around £10,000 in savings," says Rob Clifford of broker Mortgageforce, "but that figure is becoming more arbitrary."

Another practice that is dying out is the requirement for borrowers to take out a discounted variable interest rate for an offset deal. Yorkshire building society offers fixed-rate offsets over two and five years - both at 4.84 per cent followed by base rate plus 0.79 per cent for the rest of the loan term. Coventry building society has a two-year fix at 4.99 per cent followed by base plus 0.75 per cent.

As with all short-term deals, check for tie-in periods and extended redemption penalty charges when you switch away.

Borrowers should also look at different offset features, as these vary from lender to lender. For example, Norwich & Peterborough building society and the Woolwich allow a current account to be linked to the offset, which lets you reduce monthly interest payments further.

As an alternative to offsets, if you have a large permanent savings balance, it's worth considering paying all or most of this into your mortgage (as an overpayment) to reduce your loan-to-value and get a better rate.

Steve and Lesley Fleet from Chelmsford in Essex recently remortgaged to Abbey's Flexible Plus offset deal, a lifetime tracker with a current rate of 4.99 per cent (base plus 0.49 per cent).

Steve pays dividends from his own small business into his linked savings account, "which means we are effectively overpaying around 15 per cent each month. Even if you pay in a cheque for £20, it all helps."

The Fleets are currently on track to repay the mortgage five years ahead of schedule.

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