Mortgage borrowers could miss out on massive savings by failing to offset.
Saving £8,000 is a tempting proposition isn’t it? And it isn’t a gimmick or a con. It’s a perfectly realistic scenario for those borrowers who are willing to embrace an offset mortgage – and it won’t cost you a penny.
Offset mortgages (and their predecessors Current Account Mortgages) have permanently changed the way that many Brits think about their mortgage. No longer a ball and chain around your neck for 25 years, the offset allows you to manage your mortgage your own way.
They have certainly helped many borrowers save thousands of pounds and slash years off their mortgage term over the last decade, since they established a foothold in the UK mortgage market.
And yet, despite the financial benefits of offsets and their ability to adapt to your lifestyle, more than twice as many Brits save their money (42%) rather than pay down their mortgage debt (21%), according to offset mortgage provider First Direct.
Missing out
In other words, more of us choose to put our excess cash into savings accounts, earning a paltry rate of interest that we are then taxed on, rather than really maximising our money to help get rid of the biggest debt we will ever face – our mortgage.
First Direct reckons that a lack of knowledge is causing many to miss out. It says that a third of borrowers don’t even know the interest rate on their mortgage and 25% are not sure if they are able to overpay.
But what really stops borrowers from overpaying is the perception that by overpaying their mortgage they are losing their money.
In fact, you can keep your savings pot separate to your mortgage and access it readily with an offset deal. But while it is sitting there is it working hard to reduce your mortgage payments or your mortgage term.
So how does it work?
Offsets in action
Offset deals enable you to take your savings and ‘effectively’ overpay them into your mortgage. This way you are charged the best rate of interest on the overall balance.
For example, you might have a £200,000 mortgage that you pay a 3% interest rate on, and £20,000 in a savings account that you earn 1% interest on (and remember that interest is then taxed).
That £20,000 will work harder for you reducing your mortgage balance. By using an offset, you would only pay mortgage interest on a balance of £180,000. That means you would avoid having to pay 3% interest on £20,000 of your debt, rather than earning 1% on it in your savings account.
So you sacrifice earning a low rate of interest on your savings in order to avoid paying interest at the higher mortgage rate.
By ‘effectively’ overpaying your savings into your mortgage, you owe your lender less money, so you are charged less interest on your debt.
The benefits
[SPOTLIGHT]There are two ways you can benefit from effectively having a lower debt by offsetting. Some lenders use it to reduce your monthly repayments, giving you instant savings.
For example, First Direct says that by offsetting their savings against their mortgage debt, the average mortgage holder could reduce their monthly repayments by £28.25 while retaining access to their savings. This is based on an average mortgage loan of £119,700 (according to the Council of Mortgage Lenders) and an average savings pot of £8,401 (according to research conducted by Opinion Matters).
With some lenders you can choose to maintain the level of your monthly repayment, which helps you chip away at the debt more quickly. Because you effectively owe less money, and therefore less interest, more of your monthly repayment can go towards paying off your debt each month.
The cumulative effect of reducing your debt and then owing even less interest can literally save you thousands of pounds and cut years off your mortgage term.
According to Woolwich, if you have a £150,000 (25-year repayment) mortgage charged at 3.29% and you offset £20,000 of savings against it, you will knock two years and six months off your mortgage term, and keep instant access to those savings.
This would save you almost £8,000 (£7,973.95) over the term of your mortgage and you get to keep your savings pot!
Pay it off quicker
If you also decided to use your £20,000 savings to actually help pay off the mortgage, you could be mortgage free after 20 years and 3 months, wiping almost five years off your mortgage term.
To recap:
- By offsetting your savings while maintaining complete access to them you are effectively overpaying your mortgage.
- In addition you can choose to actually overpay (either using those savings or with money from another source), reducing your debt even more quickly.
Of course you can overpay most mortgages up to 10% of the balance a year anyway, which will help reduce your debt more quickly, but you will usually no longer have access to that money.
The most important thing to note about offset mortgages is that your savings remain in a separate pot and, unless you decide to use them to pay off your homeloan, you are able to access them in the same way as other savings accounts.
And for each and every day they are sitting there, you are saving more money on your mortgage.
Below are some of the best offset deals:
15 fabulous offsets
|
LENDER |
TYPE OF DEAL |
RATE |
FEE |
MAX LTV |
|
2-year tracker |
2.18% |
£1,499 |
65% |
|
|
Term tracker |
2.48% |
£1,499 |
65% |
|
|
2-year tracker |
2.59% |
£1,495 |
70% |
|
|
2-year tracker |
2.59% |
£999 |
65% |
|
|
2-year discount |
2.59% |
£998 |
75% |
|
|
2-year tracker |
2.69% |
£995 |
75% |
|
|
2-year tracker |
2.75% |
£645 |
80% |
|
|
3-year fix |
2.88% |
£1,999 |
65% |
|
|
2-year fix |
2.95% |
£999 |
65% |
|
|
2-year fix |
2.99% |
£1,895 |
70% |
|
|
2-year fix |
3.04% |
£995 |
75% |
|
|
2-year fix |
3.09% |
£795 |
75% |
|
|
2-year fix |
3.14% |
£395 |
70% |
|
|
5-year fix |
3.39% |
£1,495 |
70% |
|
|
2-year fix |
3.64% |
£1,895 |
85% |
More: Cost of mortgage repayments falling | How to stand the best chance of getting a mortgage
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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage