Is It Time To Consider An Offset Mortgage?
Published: 1 November 2011 By Peter Thompson Leave a Comment
If you have a mortgage and savings, have you considered an offset mortgage? If not, now might be the time to do so.
The Bank of England base rate remains at 0.5% and inflation hit 5.2% in September. A significant disparity and one that is hitting savers as interest rates on savings accounts are not high enough to generate enough return on savings.
One option, for those with a mortgage and savings, is to consider switching to an offset mortgage to help protect hard earned cash from the ravaging effects of inflation.
How does an offset mortgage work?
Offset mortgages set savings against the total debt of a mortgage. Unlike a savings account, interest is not earned on the balance of the savings pot; instead the money is set against the outstanding mortgage, with interest only charged on the remaining balance.
As a consequence the mortgage will be paid off earlier, because the monthly repayments are based on the full mortgage amount, and the total interest paid will be far less.
As offfsets are totally flexible, as the borrower you can access your savings at any time – the mortgage balance on which interest is earned will simply adjust.
An illustration of how an offset mortgage can save money
A £150,000 repayment mortgage over 25 years with First Direct’s 2 year tracker mortgage at 2.08%, plus £50,000 in a linked savings account, would mean interest would only be paid on the balance of mortgage outstanding i.e. on the remaining £100,000.
This would mean a saving of £6,799 in interest payments over the lifetime of the mortgage and would also knock 3 years 5 months off the time it takes to clear the debt as the monthly payments would be based on the full £150,000 loan.
Clare Francis, site editor at MoneySupermarket.com, commented: “In the past the rates on offsets tended to be higher than those on standard mortgage products which meant you needed a significant amount in savings to make offsetting worthwhile. However, there is now very little difference so they’re suitable for more people.
“Offsetting is particularly attractive for higher and top rate taxpayers because you pay less tax due to the fact that you don’t earn any interest on your savings. Instead your savings work to reduce your mortgage more quickly.”
MoneyHighStreet comments: “As with all personal finance related decisions, selecting a mortgage needs to be done on the basis of what best suits your individual needs.
“As Clare points out, current offset rates are lower than they have previously tended to be and as such are likely to be attractive to a wider range of people, not just those with significant savings to offset against their loan.
“Alternatively, a straight forward fixed rate mortgage for example can help with your budget as you know your mortgage payments are a set amount for an agreed period of time.
“Another option is to consider a discount mortgage.
“Whatever you opt for though be sure to do your research, seeking professional advice if need be.”