According to industry research, fewer than 10 per cent of people are currently offsetting their savings against their mortgage.
An offset mortgage is a proven and tax-efficient way to cut your mortgage costs, and it’s surprising that more people aren’t taking advantage, particularly now that interest rates on savings accounts are at rock bottom. For a start, there’s no tax to pay on your savings interest and the rate you receive is the same as your mortgage rate.
With interest rates on instant access and one-year savings accounts struggling to hit 2 per cent, for many people there’s far more to be gained by offsetting their nest egg against their mortgage balance, which in many cases is being charged at nearer 4 per cent.
Another key benefit is that offsetting gives you flexibility. You always retain access to your entire savings balance in case you need to dip into it at a later date. A major reason for the poor take-up is that consumers assume it’s a complex product and only suitable for those with large savings balances, but both of these assumptions are wide of the mark.
Unfortunately, not all banks and building societies offer the offset facility, so some customers are missing out because they aren’t given the chance to take advantage of this product. With Barclays and First Direct, Yorkshire Building Society is one of the main players in the offset market and, unlike some rivals, it allows offset to be used on its entire range of standard mortgage products with just a 0.2 per cent loading on the rate.
Offset is available across a wide range of loan to values (LTV) with some of the top deals being First Direct three-year fixed at 2.99 per cent and £499 fee to 65 per cent LTV, Yorkshire Building Society three-year fixed at 3.04 per cent and £495 fee to 75 per cent LTV and Barclays Lifetime Offset Tracker at 3.69 per cent and £1,499 fee up to 70 per cent LTV.
To give you a taste of the savings you can achieve with an offset and to prove it is a viable option for those with fairly modest savings or who intend to save on a regular basis, the following numbers highlight the positive impact this strategy can have on your finances.
For someone with savings of £5,000, offsetting this balance against a £100,000 mortgage at 4 per cent would save interest charges of £8,016 and takes one year and three months off the term of a 25-year mortgage.
You don’t have to have a huge lump sum to benefit from offsetting, regular savings will work too. For example, if you are able to put aside £150 per month into your savings account each month, then you’ll save £20,518 in mortgage interest charges, cut three years and two months off the length of your 25-year mortgage, plus you’ll end up with a savings balance of £39,300 when the mortgage is repaid.
In the past, people have opted for a standard mortgage without a second thought but, with a growing number of more competitive, offset options to choose from and savings accounts offering poor returns, it’s time more borrowers started to take advantage of these considerable financial benefits.
Consumers want brands to keep things simple
With money tight, shopping around to find the best deal has almost become a national pastime thanks to the vast range of information at our fingertips 24/7 through our PCs, laptops, tablets and smartphones.
A recent report from consumer trends agency Canvas8 revealed that 48 per cent of people spend hours shopping around because they fear missing out on a good deal.
Seeking out the best deal is almost second nature in sectors such as personal finance, telecoms and utilities. However the report claims that shoppers want brands to make their life easier by offering simple, flexible and transparent deals.
In the energy sector, for example, which has been criticised for the number and complexity of tariffs on offer, EDF Energy Blue Plus Price Promise tariff monitors the market for customers, informing them if another supplier is more than £1 a week cheaper at typical use.
The tariff, which fixes energy prices at a highly competitive price, also allows customers to leave for free at any point.
There’s definitely something in this strategy with more than 1.2m energy accounts having switched to this tariff since it was launched last April. Perhaps it’s time a few more big brands adopted a similar approach instead of tying us in knots with complex and prohibitive terms and conditions.
Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk