Many of you are despairing of ever getting decent returns on your savings, especially with a mortgage to pay off.
So, is it time you got an offset mortgage?
Offset mortgages allow you to take the money in your savings and current accounts and set it against your mortgage.
Because you are saving interest on your mortgage instead of earning it on your savings, you don’t pay any tax on gains. This is why offset mortgages are attractive if you’re a higher-rate taxpayer.
They can also help you to pay off your mortgage much earlier.
Offset mortgages have been around for a while, but generally you have paid dearly for the flexibility they offer. The deals have been far more expensive than ordinary mortgages and have also carried hefty fees.
In the current financial climate, it is now possible to get both variable and fixed offset mortgages that compare very favourably with other deals.
- What does an offset mortgage do?
If you use an offset mortgage well, the savings can stack up, especially in the current climate where you are also benefiting from low interest rates.
Offsetting typically brings forward the day when you can pay off your mortgage, because any money you have in your current account or savings reduces the amount of interest you are paying.
What is more, the interest owed is usually calculated on a daily, rather than a monthly basis, so you benefit immediately even if the money is only in your account for a short while.
- Get impartial offset mortgage advice
- Check out popular mortgage lenders
- Claim back your mortgage exit fees
- Who is it suitable for?
An offset mortgage is not suitable for everyone. You will need to weigh up the rates that are available, together with your current situation and savings to work out whether it is worth it.
It is far more likely to work in your favour if you are a higher-rate taxpayer with lots of savings, or someone who is self employed and therefore has large amounts of money sitting in your account at various times in the month.
Some of you, especially those with smaller amounts of equity in your homes, may find that the most competitive deals are more restrictive but offer the facility to overpay your mortgage instead.
- What are the best offset deals?
The best deals are for those of you with LTV rates of 75%.
First Direct has launched a new range of market beating fixed rate offset mortgages and they are available to new and existing customers for both house purchases and remortgages, and come with a maximum loan to value of 75%.
If you are looking for a variable rate mortgage you can take out First Direct’s lifetime tracker at 2.39% above base rate and with an arrangement fee of £799.
It is also possible to find 2 year fixed offset deals with First Direct at 2.99%, with a fee of £1,498 and the same LTV restriction. There is also a three-year fixed rate available at 3.89% with a fee of £998.
For example, with the First Direct 2.99% fixed rate, you would need to receive an interest rate equivalent to 3.80% AER on your savings account if you’re a 20% taxpayer and 5.10% if you’re a 40% taxpayer, for you to achieve the same benefit as offsetting any credit balances you have against your mortgage.
The new mortgages offer you the chance to choose your terms depending on whether you are looking for lower rates or upfront fees.
However, even by locking your money up for a few years, it is hard to achieve a rate of 5.1% at present. With a five-year bond, you can get 4.4%, but you will not be able to access the money in an emergency as you would with an offset.
If you want to fix for a longer period, Melton Mowbray Building Society offers you 4.49% on a 5 year fix with a £999 fee. This has a 75% LTV.
Is it a good option for me?
To work out whether an offset mortgage is good value for you, you need to work out whether you are getting a better rate on your mortgage or on your savings. Because you do not pay tax on the offset, you will need a higher savings rate to achieve the same effect with an ordinary savings account.
- Pros
You could pay your mortgage off earlier. You are likely to save more in interest than you could earn on your savings because of the tax advantage. You can usually take your savings back at any time.
- Cons
Some offset mortgages are effectively interest only, meaning that you have to be disciplined about making capital repayments yourself. You may not get the best mortgage rate available, especially if you have a small deposit. You will need to go through the hassle of setting up linked savings accounts and maybe changing your current account.
In short, offset mortgages could be a good choice for you at this difficult time…
…but you do need to weigh up the pros and cons.
(Please note that articles on Money Hospital do not constitute regulated financial advice. The articles are intended to provide general personal financial information, and are based on journalistic research. We urge you to consult an Independent Financial Adviser (IFA) before making any important decisions about your finances. All rates are correct at time of printing but are subject to change without notice.)
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June 1st, 2009 at 12:16 pm
Be careful with some of these mortgages they sometimes don’t let you borrow anything else against your property eg secured loan – ask before you take one out
June 1st, 2009 at 8:18 pm
I took one of these out 3 years ago now at .49% over base rate for life so at the moment, I am paying .98% which as I have some 20k sitting in the offset account means that I can pay as little as £12.00 on the £37k sitting there. Over the last 3 years, I have saved some £3k in interest payments although I do pay £300.00 per month to clear the capital. Yes I had to change banks to Barclays but they offer a far better service than Santander who I was with previously and its no hassle at all.
June 3rd, 2009 at 11:42 pm
A lot of mortgages now are very flexible in what you can pay into the account so it is definitely worth investigating ‘normal’ mortgages as the cost of offset mortgages can be a bit steep.