Savvy Money: Is offset a good bet for your home loan and savings?
Check out how linking your mortgage to your cash could save you from the taxman's clutches
Saturday 08 June 2013
If you have some savings, you don't need me to tell you how low interest rates are right now. Depositing a few thousand pounds in the bank and earning enough in interest after a year for a fish and chip supper doesn't exactly inspire the savings habit. But depending on how much you have in the bank, and whether or not you need access to it, you may be better off taking out an offset mortgage.
With an offset mortgage you keep some or all of your savings in an account that's linked to your mortgage. You only pay interest on the outstanding balance, which means you can save money and, because your offset savings don't generate interest, there's no tax to pay. So, if you pay tax, especially at the 40 per cent rate or higher, an offset mortgage could be a shrewd move.
The basics of offsetting
If you want to offset your savings against your mortgage, you have to take out a special offset product (apologies if this sounds obvious). You can't just use an ordinary mortgage and try and link that with your savings account. Not all mortgage lenders offer offset mortgages and, when they do, they are more expensive than ordinary mortgages (although not necessarily much more).
There may also be less choice of fixed rate offset mortgages. Ray Boulger, from mortgage brokers John Charcol says that only the Yorkshire and Coventry building societies offer a fixed rate offset mortgage of more than two years and none of the lenders offer ten-year fixed rate offset mortgages.
Pros and cons of offsetting
The main advantage of an offset mortgage is that it can save you money on your mortgage interest payments and, potentially, reduce your mortgage term. The other benefit is that it can save you tax on your savings – unless all of them are already in cash ISAs or you're a non-taxpayer, in which case there's no tax to pay on the interest in the first place.
You can also get access to your offset savings easily (access is pretty much instant), unlike some so-called "flexible" mortgages, where there may be restrictions on when and how you do this.
But there are disadvantages, the main one being the fact you will pay more for an offset mortgage, which may outweigh the tax-saving benefits and there's less choice.
Comparing the costs
Offset mortgage rates are typically between 0.2 per cent and 0.8 per cent higher than non-offset mortgages, depending on the lender. For example, Ray Boulger says that Yorkshire building society have an offset version of most of their mortgages and charge 0.2 per cent more for it across the board.
Other lenders tend to have a higher differential for their offset mortgages and it's not a uniform amount. "That means there is a lot of comparing for you to do. A mortgage lender that's a best buy for a non-offset mortgage may not be so with their offset deal," says Boulger.
Is an offset right for you?
You might think that if you have a nice pile of cash in your bank or building society, and you also have a mortgage, you'd be the perfect candidate for an offset mortgage. But it's not that straightforward. Sure, there's no point in signing up for an offset mortgage if you don't have any – or much – savings, as you'll just be paying a higher mortgage rate for no reason.
But if you have a lot of savings relative to the size of your mortgage and you won't need access to them, you may be better off using a proportion of the money to reduce the loan to value ratio of your mortgage. Mortgage lenders charge a higher interest rate the more you want to borrow and a mortgage with a loan to value (LTV) of 85 per cent could be around one per cent higher than one with an LTV of 75 per cent.
Some people say you should only consider an offset mortgage if you have 20 per cent of the value of your mortgage in savings, but it is not that simple.
Whether an offset is right for you depends on the interest rate your savings are earning, the interest rate you would pay to get the offset mortgage you want, the interest rate you would pay on a comparable non-offset deal and whether or not you are a taxpayer.
An offset mortgage could be worth considering if you have savings that you need access to from time to time, but you'll have to carefully weigh up the extra costs, loss of interest and tax saved.
- 1 Toddler throws a tantrum at the White House – in front of Barack Obama
- 2 Irish people are travelling home from all over the world so they can vote to legalise gay marriage
- 3 Picture of couple posing with beached dolphin 'that later died' causes outrage
- 4 16-year-old girl beaten and burned alive by lynch mob in Rio Bravo, Guatemala
- 5 Witch doctor arrested after forcing newborn baby to walk in Indian village
As a white man, I'm surprised more women aren't tweeting the hashtag #KillAllWhiteMen
Scotland may have to leave the EU even if it votes to stay in, David Cameron confirms
Report finds that Britain's wages are the most unequal in Europe
The day that Britain resigned as a global power
Almost a third of school pupils believe 'Muslims are taking over our country', study claims
Gay marriage 'Bert and Ernie' cake bakery found guilty of discrimination in Northern Ireland
iJobs Money & Business
£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...
£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...
£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...
£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...
Day In a Page
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof