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 even the very best instant access and one-year savings accounts struggling to hit 1.5 per cent, for many there's far more to be gained by offsetting a nest egg against mortgage balances that are being charged at upwards of 3 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 lenders offer the offset facility, so some customers miss out as they aren't even given the option.
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% 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 three-year fixed at 2.79 per cent and £950 fee to 65 per cent LTV; Yorkshire Building Society five-year fixed at 2.89 per cent and £845 fee to 75 per cent LTV; and Barclays Lifetime Offset Tracker at 2.29 per cent and £999 fee up to 75 per cent LTV.
To give you a taste of the savings you can achieve with an offset and to prove that it is a viable option for those with fairly modest savings or those 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 £7,500, offsetting this balance against a £100,000 mortgage at three per cent would save interest charges of £7,753 and takes 16 months off the term of a 25-year mortgage.
You don't have to have a huge lump sum to benefit from offsetting, either. Regular savings will work, too.
For example, if you are able to put aside £200 per month into your savings account each month, you'll save £17,159 in mortgage interest charges, cut three years off the length of your 25-year mortgage – plus you'll end up with a savings balance of £52,800 when the mortgage is repaid.
In the past, people have chosen a standard mortgage without really giving it a second thought, but with a wider choice of competitive offset options and savings accounts paying next to nothing, it's time that more borrowers took advantage of the financial benefits that offset can deliver.
Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk
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