Money Insider: Taking an offset mortgage can save you thousands
Friday 01 November 2013
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
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