The more you save, the sooner you pay off the home loan

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The Independent Online

Six years have passed since the first offset mortgage deal.

A revolutionary loan from the Woolwich, it was - with interest set at least half a percentage point above standard deals - also very expensive.

For the uninitiated, this type of mortgage allows you to offset your savings against what you owe in return for a commensurate reduction in your interest repayments.

Say you have £15,000 in savings and a £175,000 repayment mortgage with interest charged at a rate of 5.23 per cent. An offset deal could save you £34,873 in interest and knock three years and 10 months off the life of a 25-year loan, according to figures from the Woolwich. As a specialist in the field, it has roughly one in six customers on offsets.

Although your monthly repayments usually stay the same, offsetting allows you to pay the mortgage off quicker and so pay less interest over the term. And while you won't earn interest on your savings, the link to the home loan means you don't pay tax on them either.

Plus, there is usually much greater flexibility than with conventional loans. Borrowers can overpay, underpay, take payment holidays and withdraw some of their savings. Such features have in the past carried a hefty price tag but, thanks to fierce competition among lenders, this price margin has eroded over the years.

Some of today's offset loan rates are - nominally at least - the lowest on the market. For example, a two-year tracker offset launched by mortgage broker John Charcol earlier this month is priced at 0.51 per cent below the Bank of England base rate. Even with the recent hike in rates, it is payable at just 4.24 per cent. However, it comes with an eye-watering arrangement fee of £2,499, making it best suited to loans of at least £300,000.

Even for smaller loans, prices for offsets look competitive. Intelligent Finance has a two-year tracker offset priced at base rate plus 0.05 per cent, which gives a current pay rate of 4.8 per cent. The fee is £599.

Note that the current enthusiasm is only for discounted tracker offsets - fixed-rate offsets don't offer such good value.

So, with most borrowers having some sort of savings, should we all now weigh up offset loans? Not according to Melanie Bien at broker Savills Private Finance.

"To really take advantage of all the features, we recommend having 10 per cent of your mortgage debt in savings," she says.

Ray Boulger of John Charcol argues that borrowers should look at more than just their level of savings: "Whether an offset is the right choice depends on the volatility of your cashflow, the actual size of your mortgage, the net amount you will have in savings over the deal period, and if you want access to savings."

Your occupation is likely to be a factor. If you receive large bonuses or are self-employed and save for your tax bill, an offset could prove the best option.

Poultry farm worker Michael Bradwell, from Suffolk, has remortgaged to N&P's offset lifetime tracker. At 0.9 percentage points above base rate, it is more expensive than a mainstream mortgage, but his circumstances justify the premium, he says.

"Although my mortgage was for only £36,000, the minimum you could borrow was £50,000 so we took this and put the extra £14,000 straight into a linked savings account. "In addition to my own savings - which were already held with N&P - this made a total of £36,000 offset. In less than year, I've saved over a thousand pounds in interest."

Mr Bradwell makes overpayments on his mortgage and is scheduled to have it cleared within 10 years.

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