Money Insider: Too many missing out on offset mortgage benefits
Saturday 16 April 2011
consumers are continually looking at ways to save or make money via financial services products. Whether it's getting an extra 0.2 per cent interest on their ISA, making a £50 annual saving on their car insurance or maybe changing their energy provider every 12 months, there's plenty of switching and saving going on.
It's great that people are prepared to take a little time and effort to get a better deal from their bank or insurance company, as it keeps the providers on their toes. However, there's one area where people have the potential to save an awful lot more money for far less effort, but many still don't consider it, and that's by taking out an offset mortgage.
With an offset mortgage, we're not talking about saving the odd £20 or £30 here and there, it's a real opportunity to save thousands of pounds, just by being smarter with your money.
With savings rates still barely above their record low point, offsetting your nest egg against your mortgage is a no-brainer. For starters, you don't have any tax to pay on your savings, and secondly the rate of interest you get is effectively the same as your mortgage rate, plus you always retain full access to your savings if you need it.
A recent survey by Yorkshire Building Society, one of the main players in the offset market, revealed that only 7 per cent of borrowers considered an offset product when taking out their mortgage.
There are a number of reasons why this figure is so low. Many of the banks and building societies in the UK don't offer the offset facility, and therefore some customers are never told about the potential benefits of the offset product.
Another reason for the poor take-up is that consumers think that an offset mortgage is a complex product and only suitable for those with a sizeable savings balance. Both of these assumptions are incorrect.
To give you a taste of the savings you can achieve with an offset mortgage and to prove that it is still viable for those with a fairly modest savings balance or those who intend to save on a regular basis, I'm sure the following numbers will raise a few eyebrows.
For someone with savings of £2,500, offsetting it against a £100,000 mortgage would save you interest costs of £4,142 and take seven months off the term of your 25-year mortgage.
If you are able to save £150 per month into your savings account, then you'll save £20,518 in mortgage interest, cut three years and two months off the term of your mortgage and end up with a savings balance of £39,300 when the mortgage is repaid – convinced now?
If you were looking for an offset mortgage four or five years ago, it was quite common to pay an extra 1 per cent on the mortgage interest rate. However recent Moneynet research shows that the average premium on the rate is now just 0.36 per cent, with some lenders, including Yorkshire Building Society and Britannia, charging just 0.1 per cent more than for a standard mortgage.
With the ability to make such radical savings, it's disappointing that more people aren't taking advantage of this tax-efficient way of saving money, and yet another reason why personal finance education should be mandatory in all schools.
At least it would ensure that people understand how to make real cost savings, rather than toiling away to save the odd few pounds extra here and there by frequently switching savings accounts, credit cards or shopping round for the best current account.
The short-term fixed savings market is currently a hotbed of activity, and whereas just six months ago it was virtually impossible to get a rate of 3% on a one-year bond, there are 10 accounts offering a rate of 3.25% or more. This week Sainsbury's Finance launched a new 12-month bond offering a very competitive 3.35% AER on balances of £5,000 or more, although the top rates in this field are currently courtesy of FirstSave at 3.50% AER, followed closely by AA Savings and Tesco Bank, both at 3.40% AER.
Clydesdale Bank and Yorkshire Bank have just launched a new Regular Home Saver account to encourage first-time buyers to build a deposit. Those who save a 5% deposit and take out a mortgage with Clydesdale/Yorkshire will receive a £500 bonus, and for those managing to accumulate a 10% stake the bonus reward is £1,000. The first-time buyer market is still slow and so any new initiatives that encourage people to consider buying a home rather than renting will be welcomed by the industry and also benefit the wider economy.
Andrew Hagger is a money analyst at Moneynet.co.uk
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