Mortgage offsetting: A balancing act that might prove rewarding
If you've got the savings to do it, an offset mortgage can save you a bundle, says James Daley
Saturday 21 June 2008
Combining your savings, mortgage and even your current account into the same package has never been a concept that's taken off in a big way in the UK. While offsetting – as it's known in the banking world – is very popular in countries such as Australia, it still represents a relatively small part of the mortgage market over here.
But although offset accounts are certainly not suitable for everyone, the recent tougher economic conditions have begun to make them a more attractive proposition for an increasing number of people. If you've got a decent amount of savings that you need to maintain easy access to, then putting them into an offset account could help you to pay off your mortgage much faster, while retaining the flexibility you need with your cash.
"In any housing market downturn, it is important to reduce your mortgage if you possibly can," says Melanie Bien, a director of independent mortgage broker Savills Private Finance. "If property prices fall, the threat of negative equity – where your mortgage is greater than the value of your home – grows. By reducing your mortgage, you reduce this risk."
Alternatively, an offset account could help you to reduce your monthly mortgage payments, taking some of the financial strain off your monthly budget, at a time when food and energy prices are on the rise.
How does offsetting work?
Most offset accounts work by deducting the balance of your savings from the balance of your mortgage – leaving you to pay the interest only on the difference. Some, such as those offered by Intelligent Finance and the One Account, also allow you to offset any money in your current account as well.
In most cases, you'll still continue to pay the same amount on your mortgage each month as you would have done if you'd had an ordinary home loan. However, the interest will be much less, so you'll end up paying off your mortgage at a much quicker rate.
If you'd prefer to see the benefits more immediately, some providers, such as Intelligent Finance, Woolwich and First Direct, will allow you to use the benefit of the offset to reduce the amount of your monthly mortgage payment instead.
Obviously, by opting for an offset product, you're sacrificing the interest that you would receive on your savings in an ordinary account. However, the benefits that you get from an offset product are tax-free, so they can work out to be extremely good value.
Who is offsetting suitable for?
David Hollingworth of London & Country, the independent fee-free mortgage broker, says that you need to have savings equivalent to at least 5 or 10 per cent of your mortgage before it's worth considering an offset mortgage. Or, at the very least, you need to be willing to start making decent-sized monthly payments into your savings.
Hollingworth adds that offsets are also well-suited to people who earn much of their annual income via bonuses. "If a bonus is an integral part of your income – and you will need to draw on that money at some point – you can still benefit by offsetting it, while retaining the ability to withdraw it when you need."
Are offsets good value?
For most people, this is the toughest question to get a straight answer to. Obviously, the higher the interest rate, the more value you're getting from your savings. However, if the rate is high, you're also paying more interest on your mortgage. Because most people's mortgages are much bigger than their savings, it still almost always makes sense to go for a low mortgage rate, rather than being attracted by the high rate you'll be getting on your savings.
If you could save 0.5 or even 1 percentage point by choosing a regular mortgage over an offset, you'll almost certainly be better off on the regular deal. You can always put your savings into a high interest savings account, and use any interest you earn to make overpayments on your mortgage. "Most lenders let you overpay by up to 10 per cent of the outstanding mortgage amount per annum without penalty," says Bien.
Although, historically, offset rates have tended to be a little higher than the keenest-priced regular mortgage products, the rates are now much more competitive than they were. For example, First Direct's 5.99 per cent two-year fixed rate offset, which was launched this week, is as cheap as any ordinary two-year fixed rate on offer (although it does have a fee of £1,498).
Hollingworth says that, for a higher rate taxpayer, you'd have to be earning 9.98 per cent to get the same benefit from your savings – so if your mortgage is large enough to justify the hefty fee, and you've got a large amount of savings that you need to keep in cash, the First Direct product will certainly offer you good value.
If you're looking for a tracker, Bien says that Woolwich currently offers the best deal – charging 0.99 per cent above the Bank of England base rate (which is currently 5 per cent). Again, this is as cheap as any ordinary tracker mortgage, so it is well worth considering.
Be aware, however, that the Woolwich mortgage is only available on loans worth up to 60 per cent of a property's value – so you'll need to have a considerable chunk of equity in your property to qualify. First Direct will lend up to 80 per cent on its offset mortgage.
To find out how much you could save with an offset mortgage, visit www.oneaccount.com or www.if.com, both of which have interactive tools to help illustrate how you could benefit. For independent mortgage advice, visit www.lcplc.com or www.spf.co.uk.
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