As a proven and tax-efficient way to cut your mortgage costs it’s surprising that so few people aren’t taking out offset mortgages, particularly in the current climate with interest rates on savings accounts at rock-bottom.
For a start there’s no tax to pay on your savings interest and the rate you receive is the same as your mortgage rate.
With interest rates on instant access and one-year savings accounts struggling to hit 2 per cent, for many people there’s far more to be gained by offsetting their nest egg against their mortgage balance which in many cases is being charged at nearer double that rate.
Another key benefit that offsetting delivers is flexibility, in that you always retain access to your entire savings balance just in case you need to dip into it at a later date.
A major reason for the poor take-up is that borrowers assume it’s a complex product and only suitable for those with large savings balances. Both of these assumptions are wide of the mark, however, as I’ll come to illustrate.
Unfortunately not all banks and building societies offer the offset facility, and therefore some people aren’t given the chance to take advantage of this product.
Along with Barclays and First Direct, Yorkshire Building Society is one of the main players in the offset market. 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) with some of the top deals as follows – First Direct three-year fixed at 2.99 per cent and £499 fee to 65 per cent LTV; Yorkshire Building Society three-year fixed at 3.04 per cent and £495 fee to 75 per cent LTV; and Barclays Lifetime Offset Tracker at 3.69 per cent and £1,499 fee up to 70 per cent LTV.
Here’s an idea of the savings you can achieve with an offset, proving that it is a viable option for those with fairly modest savings or those who intend to save on a regular basis. Say you have savings of £5,000. Offsetting this balance against a £100,000 mortgage at 4 per cent would save interest charges of £8,016 and take one year and three months off the term of a 25 year mortgage.
It doesn’t have to be a huge lump sum for you to benefit from offsetting, regular savings will work too.
For example, if you are able to put aside £150 into your savings account each month, then you’ll save £20,518 in mortgage interest charges, cut three years and two months off the length of your 25 year mortgage plus you’ll end up with a savings balance of £39,300 when the mortgage is repaid.
Borrowers still tend to opt for a standard mortgage without giving it a second thought. But with a wider range of competitive offset options to choose from and savings accounts offering such paltry returns it’s time that more borrowers started to take advantage of these considerable financial opportunities.
l Andrew Hagger is personal finance expert at www.moneycomms.co.uk