An offset mortgage is a smart and tax-efficient way to cut your mortgage costs, yet surprisingly only around ten per cent of borrowers are currently taking advantage of this type of home loan.
It can be a big money-saver for mortgage borrowers and makes even more sense in times like these when interest rates on savings accounts are at rock bottom. By simply combining your savings and mortgage balances it’s possible to save thousands of pounds in mortgage interest costs and at the same time reduce the term of your home loan.
Another key benefit, even more so for higher-rate tax payers, is that there’s no tax to pay on your savings interest and the equivalent return is the same as your mortgage rate.
With interest rates on instant access and 1-year savings accounts struggling to hit 2 per cent, for many people there’s far more to be gained by offsetting your nest egg against your mortgage balance, which in many cases is being charged at upwards of 3.5 per cent.
A further plus point is that offsetting gives you flexibility, in that you always retain access to your entire savings balance in case you need to dip into it at a later date.
Although many standard mortgages will allow you to make limited over-payments, unlike an offset mortgage, once you’ve committed to the overpayment you can’t get that money back 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.
A further issue is that not all banks and building societies offer the offset facility, and therefore some customers are missing out because they aren’t even given the option to take advantage of this breed of mortgage. Along 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 as follows - First Direct 3-year fixed at 3.09 per cent and £950 fee to 65 per cent LTV; Yorkshire Building Society 5-year fixed at 3.89 per cent and £345 fee to 75 per cent LTV; and Barclays Lifetime Offset Tracker at 2.99 per cent and £1,499 fee up to 75 per cent LTV.
To prove an offset 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 on your finances.
For someone with savings of £5,000, offsetting this balance against a £100,000 mortgage at 4.00 per cent would save interest charges of £8,016 and take 1 year and 3 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 can 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 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 chosen a standard mortgage without really giving it a second thought, but with a wide range of competitive offset options to choose from and savings accounts paying next to nothing it’s time more borrowers considered the financial benefits offset can deliver.
Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk
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