Offset mortgages are a smart and tax-efficient way to cut mortgage costs, yet only around one in 10 borrowers take advantage of them.
They can be big money savers and make even more sense when savings rates are at rock bottom. By combining your nest-eggs 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 taxpayers, 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 break 1.5 per cent, for many people there's far more to be gained by offsetting your savings against your mortgage balance, which in many cases is being charged at upwards of 3 per cent.
A further plus point is that offsetting provides flexibility, in that you always retain access to your entire savings balance in case you need to dip into it. Although many standard mortgages will allow you to make limited overpayments, unlike with an offset mortgage, once you've committed to the overpayment you can't get that money back.
A big reason for the poor take-up of offsets is that consumers assume they're complex 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 an offset deal.
Along with Barclays and First Direct, Yorkshire Building Society is one of the main players in this 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 (LTVs), and among some of the top deals are the following: a First Direct three-year fixed mortgage at 2.79 per cent, with a £950 fee, up to 65 per cent LTV; a Yorkshire building society five-year fix at 2.84 per cent, and a £845 fee, up to 75 per cent LTV; and the Barclays lifetime offset tracker at 2.49 per cent, with £999 fee, up to 75 per cent LTV.
Not convinced that offset could work for you? Check the following numbers, which highlight the positive impact that the strategy could have on your finances.
Someone with savings of £7,500, offsetting the bal-ance against a £100,000 mortgage at 3 per cent, would save interest charges of £7,753 and cut a year and four months off the term of a 25-year mortgage.
That's a good example of the potential benefits, but you don't need a huge lump sum to benefit from offsetting; regular savings will work too.
For example, if you are able to set aside £200 in your savings account each month, then you will save £17,159 in mortgage interest charges and cut three years off the length of a 25-year mortgage – and you will 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 www.money comms.co.uk
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