Money Insider: Offset mortgages make the most of your savings
Saturday 15 October 2011
In these times of economic instability and high inflation people are getting savvier when it comes to saving or making money on banking and insurance products, but for many there is the potential to save much more.
Whether it's squeezing a little extra interest out of a savings account, saving a few pounds by moving car insurance provider or changing gas and electricity supplier, there's plenty of switching and saving going on.
It's great that people are making the effort to get a better deal from their bank or insurance company, as it keeps the providers on their toes, however there's still an area where people have the chance to save even more money for very little effort, and that's by taking out an offset mortgage.
We're not talking about saving the odd few pounds here and there, this breed of mortgage products offers the opportunity to save thousands of pounds, or to trim years off the term of your home loan, just by being smarter with your money.
With savings rates still barely above record lows, offsetting your nest egg against your mortgage is sensible, 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 important plus point is that you always retain access to your entire savings balance in case your circumstances change and you need to dip into it.
Recent statistics reveal that less than one in 10 borrowers consider an offset product when taking out their mortgage.
A major reason for the poor take-up is that consumers think it's a complex product and only suitable for the super-rich, but both of these assumptions are incorrect as I'll illustrate later.
Another issue within the industry is that not all banks and building societies offer the offset facility, and therefore some customers are missing out because they aren't given the chance to take advantage of the financial benefits and flexibility of an offset product.
Along with Barclays and First Direct, Yorkshire Building Society is one of the big players in the offset market and unlike some providers it allows offset to be used on its entire range of standard mortgage products with just a 0.1 per cent loading on the rate.
This week its Chelsea brand made its debut in the offset mortgage market with some very competitive pricing on an extensive new range of 70 per cent, 80 per cent and 90 per cent LTV loans. A couple of the stand-out products include a 2-year fix at 2.79 per cent with £195 fee and a 2-year offset tracker at 2.39 per cent with £195 fee.
To give you a taste of the savings you can achieve with this type of mortgage and to prove that it is a viable option for those with a fairly modest savings balance or those who intend to save on a regular basis, I hope the following numbers speak for themselves.
For someone with savings of £5,000, offsetting it against a £100,000 mortgage at 4 per cent would save interest costs of £8,016 and take 1 year and 3 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 3 years and 2 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 new and more competitive offset options to choose from, maybe we'll see more borrowers take advantage of the long-term financial benefits.
Although considerable investment in terms of money and staff resource are needed to develop offset functionality, lenders should be doing more to offer and promote offset so it's no longer the exception but the becomes the norm when it comes to choosing a mortgage.
KRBS launches ONE-year savings best buy
This week krbs (formerly Kent Reliance Building Society) leapt to the top of the fixed-rate savings best buy tables this week with a one-year bond paying 3.6 per cent gross. The account can be opened in branch, by post or online and requires a minimum balance of £1,000. The maximum balance is £100,000 and comes with the option to have the interest paid monthly. It's the best one-year rate seen since February 2010, so you'll need to act fast if you want a piece of the action as it's not likely to be around very long.
Andrew Hagger – Moneynet.co.uk
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