Save a packet with offset mortgages
With inflation shrinking your savings, you might as well take advantage of record low interest rates. David Stevenson explains how you could save a bundle by off-setting your savings against your mortgage.
Making a return on cash in the bank has rarely been harder. The Bank of England's bank rate is at a 0.5% record low and looks set to stay there. Ten-year gilts yield just 2.4%. So savings account deposit rates linked to these two are, to be blunt, rubbish. With the cost of living climbing at over 5% a year, you're losing a packet in real (ie, inflation-adjusted) terms.
But if you're borrowing to buy a house, you could have a way to fight back. How? By setting your savings off against your home loan. With an offset' mortgage you make a trade-off: you forgo any deposit interest you'd have received, but you also avoid paying any interest on the corresponding portion of your mortgage. In other words, the rate you effectively receive on your savings is the same as the rate you're paying on your loan. Better yet, you save any tax you'd have paid on your deposit interest the biggest gainers are higher-rate taxpayers, because their post-tax savings income is very low.
James Daley in The Independent sums it up: "If you had a £100,000 home loan and £40,000 of savings, with an offset mortgage you'd only pay interest on the £60,000 balance between the two. On a 25-year-loan at 3.75%, this would save you £16,388 and enable you to clear the mortgage more than six years early if you carried on paying the full monthly payment. This compares with not offsetting your savings over the same period and earning average interest of 2.5% and paying 20% tax."
What's more, you can still get at your savings if you need to without being penalised. You just reduce your offset' deposit, with the only cost being an increase in your loan interest. That's far more flexible than using savings to pay down your mortgage, only to find that you need them further down the line, and having to cross your fingers and hope your bank will extend your loan again.
Note, though, that there are different types of offset mortgages. The simplest keeps your mortgage and savings separate (your current-account balance can be added in if you like). Your lender then tells you how much interest you'll pay. You can also have a current-account mortgage that shows all your outstanding balances as one account.
So why isn't everyone going down the offset route? Offset mortgages account for just 7.5% of the overall mortgage market. It's partly a lack of understanding, says Andrew Hagger on Moneynet.co.uk. "A major reason for the poor take-up is that consumers think it's a complex product and only suitable for the super-rich. But both assumptions are incorrect."
It's also because mortgage brokers haven't been too keen to push offset mortgages. "Broker confidence is linked to consumer confidence," David Hollingworth of London & Country tells Mortgage Strategy magazine. "If clients look confused about offset, brokers fear they might lose them. But the time is surely right, especially as offset pricing has improved." Hollingworth tips a five-year, fixed-rate offset from Yorkshire Building Society at 3.49% with a £999 fee, which is available for purchase or re-mortgage loans up to 75% of a property's value.