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Putting funds in an offset account reduces your repayments — and has tax benefit.
If your savings are earning 0.5 per cent or something similar in a savings account, you may want to consider moving them. Although rates have improved marginally since the new year, the market leader is still just 1.01 per cent (from Royal Mail).
An offset mortgage could be just the thing, lowering your interest payments while keeping your money safe.
What is an offset mortgage?
It is a home loan that links your savings to your mortgage balance, reducing the amount of interest you are charged and offering the opportunity to pay off your mortgage sooner. For example, if you have a mortgage of £300,000 linked to a savings account of £20,000, you would pay interest only on £280,000.
Your savings are not locked up so you can use them to achieve lower mortgage rates but access them if you need to
What are the benefits?
Your savings can work harder for you by reducing your mortgage payments. What is more, your savings are not locked up so you can use them to achieve lower mortgage rates but access them if you need to — although bear in mind your loan amount will change. Plus, there are some great deals. Accord Mortgages, a lender available only through brokers, is offering customers £1,000 if they complete an offset home loan deal before January 20.
Are there downsides?
The rates on offset mortgages are often higher. Most of the lenders charge a premium of about 0.3 per cent for their offset mortgages. Only a small number offer offset options and even fewer offer them on a fixed-rate basis. “If you are going to take an offset mortgage, you need to make sure you use it. Otherwise you may well be paying a premium for no reason,” says Aaron Strutt, of Trinity Financial, a broker.
Why haven’t I heard of it?
“Offset is a great option but nowhere near as popular as it should be,” says Mr Strutt. “Lenders do not seem to be pushing offset mortgages as much as they used to, although the providers in the market have very competitively priced rates.”
Lots of the big lenders, such as Halifax, Virgin Money and Nationwide Building Society, do not offer offset loans.
“We find many clients are unaware of the availability of offset mortgages, let alone the benefits they offer in efficient cashflow management as well as tax benefits, in particular for higher and additional-rate taxpayers,” says Ray Boulger, a spokesman for the broker John Charcol.
Managing such accounts also used to be much more difficult, putting off customers. Accord expanded its range in November after significantly improving the functionality and user-friendly appeal of its accounts. You can now manage your account online, including making faster payments and setting up standing orders, and you can see at a glance the balance of your mortgage.
What are the options?
With Accord, borrowers can opt for a two-year offset at 2.14 per cent at 75 per cent loan-to-value (LTV), or at 2.24 per cent at 80 per cent LTV.
Scottish Widows, Yorkshire Building Society and First Direct also offer some of the best offset mortgages.
First Direct has a 1.59 per cent two-year fix, at 60 per cent LTV, with a £1,450 fee. For a non-offset loan the equivalent rate would be 1.24 per cent.
Scottish Widows offers a 1.29 per cent two-year fix, at 60 per cent LTV, with a £1,499 fee. An offset option is available on all Scottish Widows home loans.
Yorkshire Building Society has a 1.41 per cent two-year fix at 65 per cent LTV with a £1,495 fee.