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

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.

News
The Banksy image in Folkestone before it was vandalised
people
Life and Style
tech

Sales of the tablet are set to fall again, say analysts

Sport
football West Brom vs Man Utd match report: Blind grabs point, but away form a problem for Van Gaal
Arts and Entertainment
Gotham is coming to UK shores this autumn
tvGotham, episode 2, review
PROMOTED VIDEO
News
i100
Arts and Entertainment
Bloom Time: Mira Sorvino
tvMira Sorvino on leaving movie roles for 'The Intruders'
News
First woman: Valentina Tereshkova
peopleNASA guinea pig Kate Greene thinks it might fly
News
Brian Harvey turned up at Downing Street today demanding to speak to the Prime Minister
news

Met Police confirm there was a 'minor disturbance' and that no-one was arrested

Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010
films

George Lucas criticises the major Hollywood film studios

Voices
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'
voices

Does Chris Grayling realise what a vague concept he is dealing with?

Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

Life and Style
The charity Sands reports that 11 babies are stillborn everyday in the UK
lifeEleven babies are stillborn every day in the UK, yet no one speaks about this silent tragedy
News
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)
news

Parties threaten resort's image as a family destination

Life and Style
Northern soul mecca the Wigan Casino
fashionGone are the punks, casuals, new romantics, ravers, skaters, crusties. Now all kids look the same
Life and Style
gaming

I Am Bread could actually be a challenging and nuanced title

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

    Customer Service Executive / Inbound Customer Service Agent

    £18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

    ASP.NET Web Developer / .NET Developer

    £60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

    Operational Risk Manager - Asset Management

    £60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

    Project Coordinator - 12 month contract

    £27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

    Day In a Page

    Two super-sized ships have cruised into British waters, but how big can these behemoths get?

    Super-sized ships: How big can they get?

    Two of the largest vessels in the world cruised into UK waters last week
    British doctors on brink of 'cure' for paralysis with spinal cord treatment

    British doctors on brink of cure for paralysis

    Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
    Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

    Salisbury ranked seventh in world’s best tourist cities

    The city is home to one of the four surviving copies of the Magna Carta, along with the world’s oldest mechanical clock
    Let's talk about loss

    We need to talk about loss

    Secrecy and silence surround stillbirth
    Will there be an all-female mission to Mars?

    Will there be an all-female mission to Mars?

    Women may be better suited to space travel than men are
    Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

    'They poured water on, then electrified me...'

    If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
    James Wharton: The former Guard now fighting discrimination against gay soldiers

    The former Guard now fighting discrimination against gay soldiers

    Life after the Army has brought new battles for the LGBT activist James Wharton
    Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

    Panic over Ebola threatens to infect the midterms

    Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
    Premier League coaches join the RSC to swap the tricks of their trades

    Darling, you were fabulous! But offside...

    Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
    How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

    How to dress with authority

    Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
    New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

    New book on Ian Curtis sheds fresh light on the life of the late singer

    'Joy Division were making art... Ian was for real' says author Jon Savage
    Sean Harris: A rare interview with British acting's secret weapon

    Sean Harris: A rare interview with British acting's secret weapon

    The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
    Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

    Tim Minchin interview

    For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
    Boris Johnson's boozing won't win the puritan vote

    Boris's boozing won't win the puritan vote

    Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
    Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

    Tim Wheeler: Alzheimer's, memories and my dad

    Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album