Money Insider: Taking out an offset mortgage is a savvy move
Saturday 21 April 2012
In these times of economic hardship and high inflation, people are becoming more savvy when it comes to saving or making money on their banking and insurance products. But for many there's potential to save an awful lot more.
Whether it's squeezing a little extra interest out of a savings account, moving your car insurance provider or changing gas and electricity supplier, there's plenty that can be done.
However, there's still an area where people have the chance to save a much bigger chunk of money for very little effort. They can do that by taking out an offset mortgage.
I'm not talking about saving the odd few pounds here and there. An offset mortgage actually offers the opportunity to save thousands of pounds, or to trim years off the term of your home loan, just by being more organised and smarter with your money.
With savings rates still barely above record lows, offsetting your savings against your mortgage makes sense – even more so for higher-rate taxpayers.
With an offset mortgage you don't have any tax to pay on your savings' interest and the rate you receive is effectively the same as your mortgage rate.
Another key plus point is that you always retain access to your entire savings balance in case your circumstances change at a later date and you need to dip into it.
Yet less than one in 10 borrowers considers an offset product when taking out a mortgage.
That's because people assume it's too complex and only suitable for the super-wealthy, but both of these assumptions are wide of the mark.
Another issue is that not all banks and building societies offer offset, and therefore some customers are missing out because they aren't given the chance to take advantage of the financial benefits and flexibility it offers.
Along with Barclays and First Direct, Yorkshire Building Society is one of the big players in the offset market. What's more, unlike some providers, Yorkshire also allows offset to be used on its entire range of standard mortgages with just an extra charge of 0.2 per cent on the rate.
Offset is available across a wide range of loan to values (LTV), with some of the top current deals as follows – First Direct two-year fixed at 3.19 per cent and £499 fee to 65 per cent LTV, Chelsea Building Society three-year fixed at 3.44 per cent and £395 fee to 70 per cent LTV, and Yorkshire BS five-year fixed at 4.79 per cent and £295 fee up to 85 per cent LTV.
To give you a taste of the savings you can achieve with this type of mortgage consider the following numbers. (They also prove that it is a viable option for those with even a fairly modest savings balance or those who intend to save on a regular basis.)
For someone with savings of £5,000, offsetting that against a £100,000 mortgage at 4 per cent would save interest charges of £8,016 and also take a year and three months off the term of a 25-year mortgage.
Similarly, if you are able to put aside £150 per month into your savings account, then you'll save £20,518 in mortgage interest charges, cut three years and two months off the length of your mortgage and end up with a savings balance of £39,300 when the mortgage is repaid.
In the past, people have opted for a standard mortgage and not given the consequences a second thought, but with a growing number of offset options to choose from, maybe we'll see more borrowers take advantage of the long-term financial benefits.
Although considerable investment is needed to develop offset functionality, lenders should do more to promote the approach so it becomes norm when taking out a mortgage.
No-nonsense savings deals
If you're fed up with savings accounts that restrict the number of free withdrawals you can make or include a short-term introductory bonus, then take a look at a basic, no-nonsense instant-access savings account.
Should you prefer a branch-based account, check out the Virgin Money Easy Access Saver paying 2.85 per cent annual equivalent rate (AER), or for an online easy-access deal, Aldermore is paying 2.75 per cent AER (min £1,000), Sainsbury's Bank 2.6 per cent AER from £1 and the new E-saver launched this week by Norwich & Peterborough Building Society offers 2.5 per cent AER from £1.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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