Money Insider: Taking an offset mortgage can save you thousands

 

As average savings rates continue to languish, only 10 per cent of people are currently reaping the benefit of offsetting their savings against their mortgage, leaving the vast majority of homeowners potentially paying out thousands in unnecessary interest.

An offset mortgage is a proven and tax-efficient way to cut your mortgage costs, and it's surprising that more people aren't taking advantage, particularly now that interest rates on savings accounts are so poor.

For a start, there's no tax to pay on your savings interest, and the rate you receive is the same as your mortgage rate.

With interest rates on instant access and 1-year savings accounts struggling to hit 2 per cent, for many people, there's far more to be gained by offsetting your nest egg against your mortgage balance, which in many cases is being charged at nearer 4 per cent.

Another key benefit is that offsetting gives you flexibility, in that you always retain access to your entire savings balance in case you need to dip into it at a later date.

A major reason for the poor take-up is that consumers assume it's a complex product and only suitable for those with large savings balances, but both of these assumptions are wide of the mark, as I'll illustrate later.

Unfortunately, not all banks and building societies offer the offset facility, and therefore some customers are missing out because they aren't given the chance to take advantage of this product.

Along with Barclays and First Direct, Yorkshire Building Society is one of the main players in the offset market, and unlike some rivals it allows offset to be used on its entire range of standard mortgage products with just a 0.2 per cent loading on the rate.

Offset is available across a wide range of loan to values (LTV) with some of the top deals as follows – First Direct 3-year fixed at 3.19 per cent and £499 fee to 65 per cent LTV, Yorkshire Building Society 3-year fixed at 2.84 per cent and £345 fee to 75 per cent LTV, and Barclays Lifetime Offset Tracker at 3.39 per cent and £1,499 fee up to 70 per cent LTV.

To give you a taste of the savings you can achieve with an offset and to prove that it is a viable option for those with fairly modest savings or those who intend to save on a regular basis, the following numbers highlight the positive impact this strategy can have on your finances.

For someone with savings of £5,000, offsetting this balance against a £100,000 mortgage at 4 per cent would save interest charges of £8,016 and takes 1 year and 3 months off the term of a 25-year mortgage.

You don't have to have a huge lump sum to benefit from offsetting - regular savings will work too.

For example, if you are able to put aside £150 per month into your savings account each month, you'll save £20,518 in mortgage interest charges, cut 3 years and 2 months off the length of your 25-year mortgage plus you'll end up with a savings balance of £39,300 when the mortgage is repaid.

In the past, people have opted for a standard mortgage without really giving it a second thought. But with a growing number of more competitive offset options to choose from and savings accounts offering such poor returns, it's time more borrowers started to take advantage of these considerable financial benefits.

Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk

Finacial products from our partners
Property search
  • Get to the point
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

    Recruitment Genius: Admin Assistant

    £12000 - £15000 per annum: Recruitment Genius: An expanding Insurance Brokerag...

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Guru Careers: Pricing Analyst

    £30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Day In a Page

    Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

    Why Mohammed Emwazi chose Isis

    His friends were betrayed and killed by al-Shabaab
    'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

    Open letter to David Cameron

    Building the walls of fortress Europe has had deadly results
    Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

    You don't say!

    Tory candidates' election tweets not as 'spontaneous' as they appear
    Mubi: Netflix for people who want to stop just watching trash

    So what is Mubi?

    Netflix for people who want to stop just watching trash all the time
    The impossible job: how to follow Kevin Spacey?

    The hardest job in theatre?

    How to follow Kevin Spacey
    Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

    Armenian genocide and the 'good Turks'

    To continue to deny the truth of this mass human cruelty is close to a criminal lie
    Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

    'Lou needed care, but what he got was ECT'

    The truth about the singer's upbringing beyond
    Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

    This human tragedy has been brewing for years

    EU states can't say they were not warned
    Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

    Women's sportswear

    From tackling a marathon to a jog in the park, the right kit can help
    Hillary Clinton's outfits will be as important as her policies in her presidential bid

    Clinton's clothes

    Like it or not, her outfits will be as important as her policies
    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders