The 21st century mortgage
Wouldn’t it be great if your mortgage worked harder for you and adapted to fit your modern lifestyle? If you didn’t have to keep switching between lenders to find the best deal, and instead you could find a long-term solution that really made the most of your money?
That’s exactly what an offset mortgage does, and there isn’t any hard work on your part.
Offsets enable you to use your savings to cut the interest you owe your lender by a little bit each month. The cumulative effect of this over the term of your mortgage is staggering, with borrowers saving tens of thousands of pounds. In the current climate of paltry savings rates, offsets can make more sense than ever, so if you haven’t already considered one, perhaps now is the time.
How do they work?
Offsets are a revolutionary way of managing your mortgage. Instead of simply having a mortgage account, you also hold your savings (or a portion of them) with the same provider, and possibly a current account. The money you have in credit is then ‘offset’ against your debt (your mortgage), so you are charged less interest.
In other words you are charged interest on your overall balance, taking into account what you have in the black as well as in the red. For example, say you have a £100,000 mortgage balance and you offset £20,000 of savings against this. The £20,000 is then effectively overpaid into your mortgage and you are only charged your interest on an £80,000 debt. Over the course of your term this saves you an enormous amount of money. Your saving is realised in the form of reduced monthly repayments or a reduced mortgage term – either way, you avoid paying a significant sum of interest.
Louise Scott, spokesperson for Yorkshire Building Society, explains:
“The more a customer saves, the sooner their mortgage can be paid off. Alternatively, they can choose to reduce their mortgage payments, something that may be particularly useful in the current economic climate.”
In return for these benefits, you sacrifice earning interest on your savings, but because mortgage rates are higher than savings rates, it is a much better use of your money to save at the mortgage rate rather than earn at the savings rate.
For taxpayers, there’s an additional benefit. If you hold your rainy day money in a traditional savings account you will be taxed on your income at your highest rate of tax. However, you can’t be taxed on money that is saving you interest on your mortgage, rather than earning you interest, so you end up better off.
For example, if you were to offset your savings against a mortgage charged at 3.49% interest you would be effectively earning 3.49% interest on the savings. That is much higher than the actual instant access savings rates currently available. Take into account the fact that a savings account income would incur tax, and a 20% taxpayer would need to find an account paying 4.36% to beat the offset mortgage, according to First Direct, while a 40 per cent taxpayer would have to find an instant access account offering 5.32%.
Clare Francis, head of content at price comparison site moneysupermarket.com, says:
“Offsetting can be a great way of getting more from your savings and paying less tax. If you are looking for a new mortgage, it’s worth investigating whether an offset could be right for you, particularly at the moment with savings rates so low.”
You keep control
One of the best things about offsets is that your savings remain in a separate pot that is fully accessible by you. They may be working hard at reducing your mortgage debt, and therefore the interest you are charged, but you can still get your hands on your money, as and when you want to.
As Scott explains: “You can access your money at all times – if a customer wants to dip into their savings they can, without being charged, whenever they want to.“
Of course, the more savings you offset, the bigger the benefit, but it’s reassuring to know that your money is there should you need it. In addition, you can make overpayments into your mortgage account, as a lump sum or by increasing your monthly repayments.
Some offset lenders will also let you borrow back this money at a later stage if needed, depending on the terms and conditions of your deal. Put simply, these homeloans are incredibly flexible, allowing you to decide how you want to repay your debt, in a way that works around your finances and lifestyle.
But are offsets really suitable for everyone? Should you offset your savings? Any mortgage borrower that has some savings can benefit from an offset deal, and this applies even if you only have a modest amount set aside. Of course, the bigger your savings pot the more you can benefit, but Ian Bartholomew, senior mortgage product manager at First Direct, believes that offsets meet the needs of a range of borrowers.
He says: “Offsets are suited to anyone who wants to make overpayments on their mortgage debt, have the ability to redraw funds and has a positive balance in either their savings or current account, no matter how small it is.
“Those with higher amounts of savings will find they may get a better equivalent savings rate if they offset them against their mortgage borrowing. And of course, higher rate tax payers are likely to see more benefit, as they won’t pay tax on their savings.”
Not for everyone
Offsets are not for everyone and if you don’t have any savings, and you have no desire or ability to overpay your mortgage, there may be little point getting this type of deal. While providers have worked hard to make them as straightforward as possible offsets are, of course, more complex than traditional mortgages, so they are only suitable for those that understand the benefits and want to take advantage of them.
Because they offer increased flexibility offsets also tend to be slightly more expensive than other mortgages – but not by much. You may pay half a percentage point more for a mortgage with offset facilities, and sometimes not even that. Yorkshire Building Society for example, doesn’t offer specific offset deals, but allows customers to take its offset facility across its mortgage range, at a minimal premium of 0.20%.
If you are not happy with the return you are currently getting on your savings, an offset deal could be well worth considering. They’re flexible, tax-efficient and designed for modern mortgage borrowers who want their money to work harder for them, now and in the future.