When savings trample over the home loan
Melanie Bien reports on the rise and rise of the deals that will slash your interest payments if you've got enough cash put by
Sunday 30 May 2004
Offset mortgages haven't just got their foot in the door, they've kicked it wide open. One in 10 of all home loans are now offset against savings and/or current accounts - even though the first one was launched just five years ago.
Lloyds TSB and Cheltenham & Gloucester entered the fray last week. By combining Lloyds TSB's current and savings accounts with a home loan from C&G, its mortgage arm, customers will be able to play off their savings against their debts, reducing the interest on their mortgage.
"Often you think of the money in your current account as being 'dead' pending that month's bills," says David Gagie, managing director of consumer lending and current accounts at Lloyds TSB. "The great thing about offsetting is that you use the time between being paid and your monthly bills going out to reduce the amount that you're charged on your mortgage."
Offset deals let you link any number of savings accounts - and sometimes your current account - to your mortgage. If your outstanding loan is £200,000, for example, and you have £35,000 in savings, you only pay interest on £165,000. But you can access your savings at any time.
Your monthly mortgage payments remain the same as they would be if you didn't have an offset product. But you end up clearing your loan several years early as you overpay each month.
Borrowers who take out the Lloyds TSB/C&G offset deal are being offered a lifetime tracker at 0.9 per cent above the Bank of England base rate, giving a current payable rate of 5.15 per cent. This compares with First Direct's standard variable rate (SVR) of 5 per cent and the Woolwich's 5.1 per cent.
The Lloyds TSB/C&G deal could be more innovative, says David Hollingworth at broker London & Country. "It doesn't do anything that is not already offered by other lenders, and the rate's not that enticing: Universal building society offers 0.5 per cent above the base rate for life on its offset mortgage," giving a payable rate of 4.75 per cent.
Customers who want a choice of deals will also be better off with First Direct, which offers a fixed and discounted offset mortgage as well as a variable rate. There is a two-year fix at 5.49 per cent, or a discount of 1.01 per cent off the SVR for three months - giving a current payable rate of 3.99 per cent.
The problem with offset deals is that you need to have a decent sum put by. "You pay more on the rate than you would with a more conventional product, so you need to look closely at whether you've got enough savings to make it work in your favour," warns Mr Hollingworth. "Someone with an average mortgage and little in the way of savings won't really benefit."
Newcastle building society offers a standard two-year discount at 4.05 per cent, he says, a "good, clean, cheap rate".
"This is a difference of more than 1 per cent [on the Lloyds TSB/C&G offset], and to make that up you need a fair old chunk in savings - 15 to 20 per cent of your mortgage debt. Most people won't have that," he adds.
If you are interested in an offset deal, shop around for the best rate. See if you can put your current account into the mix as well as your savings, and also if you can offset the savings of family and friends - this will reduce the interest on your mortgage further still. Newcastle building society, the Woolwich and Lloyds TSB/C&G will let you do this.
The advantage of family offsetting is that your parents can help you buy a property without losing control of their money - they can access it at any time. But make sure they realise they won't receive interest on their savings while the money is offset against your mortgage.
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