Offset mortgages are currently cheaper than standard deals, according to new research.

The average two-year fixed rate offset mortgage has now dropped to 1.90% – and the average five-year fixed rate offset now sits at just 1.96%, said Moneyfacts.

These highly flexible mortgages are usually more expensive than standard mortgage products, which are currently 2.11% and 2.37% respectively.

Offset benefits

Consumers’ savings could work harder in an offset mortgage deal because instead of earning interest (currently at record low levels), the savings are used to effectively overpay the mortgage and save the borrower interest at their mortgage rate (which is usually higher).

Offset mortgages are considered the definitive flexible product, allowing a borrower to link their mortgage and their savings together, reducing the interest paid on their mortgage while still maintaining access to their savings pot.

Offsetting can result in not only being able cut years off the mortgage term, but also reducing the total amount repaid overall.

Fewer offsets available

According to Moneyfacts.co.uk research, the number of available offset products has fallen significantly compared to last year, dropping by 115 to just 95 products today, reflecting the contraction that has been seen across the wider mortgage market in recent weeks.

Eleanor Williams, finance expert at Moneyfacts.co.uk, said: “As savings rates continue to fall, and with the current circumstances meaning they are likely to continue doing so for the foreseeable future, getting a decent return on any nest egg may seem a distant dream for many. However, one alternative way of utilising savings funds that may be due a resurgence is the option of an offset mortgage product.

“Traditionally, offset mortgage rates were significantly higher than their standard counterparts, but this no longer seems to necessarily be the case. Some consumers may now benefit from exploring whether it is worth making the switch over to combine their savings and mortgage.

“Once on the property ladder, the main aim for many is to pay their mortgage balance off as quickly as possible. As a general rule, if a borrowers mortgage rate is higher than the interest rate they are currently earning on their savings, then they may find that they can save more by repaying their mortgage than they would receive in savings interest, particularly if they pay tax on the latter.

“Those who think they may benefit from an offset mortgage deal should consider their next steps carefully. Seeking independent financial advice could be invaluable in ensuring they select the right option for their circumstances.”