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

PROMOTED VIDEO
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

    Reach Volunteering: Trustee – PR& Marketing, Social Care, Commercial skills

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...

    Reach Volunteering: Charity Treasurer

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...

    SThree: Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

    Ampersand Consulting LLP: Markit EDM (CADIS) Developer

    £50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

    Day In a Page

    In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

    Iran is shifting from pariah to possible future policeman of the Gulf

    Robert Fisk on our crisis with Iran
    The young are the new poor: A third of young people pushed into poverty

    The young are the new poor

    Sharp increase in the number of under-25s living in poverty
    Greens on the march: ‘We could be on the edge of something very big’

    Greens on the march

    ‘We could be on the edge of something very big’
    Revealed: the case against Bill Cosby - through the stories of his accusers

    Revealed: the case against Bill Cosby

    Through the stories of his accusers
    Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

    The Meaning of Mongol

    Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
    Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

    Kenyans still waiting for justice over Mau Mau uprising

    Thousands join class action over Britain's role in the emergency
    Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

    The last Christians in Iraq

    After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
    Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

    Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

    Britain braced for Black Friday
    Bill Cosby's persona goes from America's dad to date-rape drugs

    From America's dad to date-rape drugs

    Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
    Clare Balding: 'Women's sport is kicking off at last'

    Clare Balding: 'Women's sport is kicking off at last'

    As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
    Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

    Oh come, all ye multi-faithful

    The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
    Dr Charles Heatley: The GP off to do battle in the war against Ebola

    The GP off to do battle in the war against Ebola

    Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
    Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

    Flogging vlogging

    First video bloggers conquered YouTube. Now they want us to buy their books
    Saturday Night Live vs The Daily Show: US channels wage comedy star wars

    Saturday Night Live vs The Daily Show

    US channels wage comedy star wars
    When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

    When is a wine made in Piedmont not a Piemonte wine?

    When EU rules make Italian vineyards invisible