Switch mortgages to get better savings

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The Independent Online

With the Bank of England keeping the base rate at 0.5 per cent on Thursday, there is little prospect of decent returns for savers any time soon.

However, rather than accepting the paltry average returns of 0.86 per cent offered on instant access accounts, savers should consider switching their mortgage to an offset deal. "With savings rates so low, it's astonishing more people aren't looking at offset mortgages given their innate tax advantages," says David Black, a banking analyst at Defaqto.

With an offset mortgage your savings are used to reduce the amount of interest you pay on your mortgage. So if you have a mortgage of £100,000 and savings of £10,000, you only pay interest on £90,000. The clever bit is that the process means the savings you use are earning the equivalent of the interest you pay on your mortgage.

In fact, it's even better than that as you effectively avoid paying tax on your savings meaning the grossed-up return is even better, as Michael White, the chief executive of online adviser Email Mortgages, explains.

"Scottish Widows is currently offering a two-year fixed rate offset mortgage at 4.79 per cent, which means your savings earn the equivalent of 4.79 per cent," he says. "Taking account of the tax liability, you'd need to find a savings account which pays approximately 5.9 per cent if you are a basic rate taxpayer, or 7.95 per cent if you are a higher rate tax payer. These sort of rates are non-existent in the current retail savings market."

"One of the best ways to make your money work harder for you in the current climate is to offset your savings against your mortgage," says Jimmy Kelly, head of mortgages at First Direct, one of the lenders promoting the deals.

Although offset mortgages can help your savings start working for you again, there are a couple of things to consider before you switch because they are not be suitable for everyone.

"Offsets can be confusing, and you need to be financially disciplined and reasonably switched on," says Andrew Hagger of Moneynet.co.uk. "If you have a current account mortgage where everything is pooled together, it can be a bit scary when you just see one net balance, for example an ATM receipt may show a six-figure debit balance."

Defaqto's David Black agrees. "The sort of people they suit are higher rate taxpayers with some savings, the self-employed, those in receipt of substantial annual bonuses, buy-to-let landlords, and people paying school fees."

The second potential disadvantage is the cost, as rates on offsets are not normally as competitive as standard mortgages. "But the differential has shrunk in recent times," says Black. "For example, Yorkshire Building Society charges just an additional 0.10 per cent on some of its range."

Although there are fewer offset mortgages around at the moment, compared with before the credit crunch, there are still some competitive rates. "Woolwich is the most competitive lender, charging 2.39 per cent above bank base rate for the term of the mortgage, giving a payrate of 2.89 per cent. There is a £1,499 fee and borrowers require a 30 per cent deposit," says Melanie Bien of independent mortgage broker Savills Private Finance.

If you have only a 25 per cent deposit, First Direct's 3.29 per cent deal, with a £499 fee, looks attractive. "But, as with mortgages, the keenest offset rates are for those with a deposit of al least 40 per cent," says Black. With that you could get Yorkshire BS's two-year 2.59 per cent deal, which has a £1,195 fee.

'Property price fall is temporary'

House prices fell 1.5 per cent last month, according to the Halifax. Its February house price index showed that the average property value has fallen to £166,587, but it is still 4.5 per cent higher than a year ago. The annual rate increased from 3.6 per cent in January because February's decline was lower than the decline in February 2009.

But the fall in prices over the month doesn't mean prices will now tumble, says David Newnes of Your Move Estate Agents. "We always knew the recovery in the housing market would have bumps along the way, but don't assume this heralds the start of a new downturn. The arctic weather conditions and the hangover from ending the stamp-duty holiday have taken a temporary toll on prices," says Newnes.

"With an election coming up and buyers waiting to see who will be in charge it's bound to be a stop-start year for lending," says property expert Nigel Lewis of FindaProperty.com. "This means we'll see monthly rises and falls in house prices – as we've seen here – as demand and supply fight for supremacy – but we're likely to end the year in the same position we started."

But Mr Newnes says now could be a good time for anyone who has been waiting to put their house on the market. "We expect more people to be out there taking advantage of lighter evenings and warmer weather to find the home they've been dreaming of for so long."

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