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Offset mortgages: a good choice for homebuyers with savings
With mortgage costs rising and savings rates falling, an offset mortgage could be the answer, says Lorna Bourke.
As the eurozone tragedy rumbles on and Spain is dragged into the crisis with a €19 billion bailout for its fourth-largest bank, Bankia, both savers and borrowers are suffering.
Homebuyers face rising mortgage costs as wholesale funding for mortgages dries up, while savers are worrying about the safety of their cash and the lousy returns offered by the banks.
But there is a way of killing two birds with one stone: protecting your savings and getting a better return while reducing your mortgage costs. For those who have both a mortgage and cash savings that they might need to access in an emergency, an offset mortgage offers the best of both worlds.
A tax-efficient option
Offset mortgages are very tax efficient, particularly for higher-rate taxpayers. It means you are effectively paying your mortgage interest out of gross, untaxed, deposit interest.
And with the best instant access savings account at The Post Office paying a miserable 3.17% gross – worth just 1.58% to a 50% taxpayer or 1.9% net of 40% tax – there is no chance of your savings keeping pace with inflation running at 3%.
‘Offset mortgages should be more popular but they are not marketed well, with the exception of the Woolwich products,’ explains Andrew Montlake of mortgage broker Coreco.
Montlake also points out that many homebuyers who took out flexible mortgages which allowed them to make capital repayments without penalty are now finding that requests to borrow back these overpayments – which are always at the discretion of the lender – are now being refused. ‘An offset mortgage gives you full access to your savings at any time whilst reducing your borrowing costs,’ he says.
So how does an offset mortgage work? You have a savings account that runs alongside the mortgage, and for every £1 of savings you pay no interest on £1 of borrowing. For example, if you have a £250,000 mortgage with a £100,000 offset savings account, you will pay interest on only £150,000 of borrowing.
A remortgage to an offset loan would be particularly advantageous to any borrower who will suffer a big rise in their lender’s standard variable rate this June. With a £250,000 loan at 4.5%, your annual interest charge works out at £11,250. But if you deposit £100,000 in an offset mortgage savings account you pay the interest on just £150,000 of the £250,000 borrowing bringing the annual charge down to £6,750 – a saving of £4,500 a year.
If a 40% taxpayer had £100,000 on deposit with the Post Office earning 3.17% they would receive just £1,902 after tax – so offsetting the savings against the mortgage is a much better bet.
‘Offset mortgages have a really good story to tell,’ confirms David Hollingworth of fee-free mortgage broker London & Country. ‘You are effectively getting a good rate of return on your cash through the offset while still retaining instant access. Flexible mortgage are now very difficult to get. Offset is definitely the way to go.’
'Best buy' offset mortgages
He quotes as a ‘best buy’ offset deals from First Direct, which has a lifetime tracker offset loan at bank base rate (BBR) plus 3.09%, giving a pay rate of 3.59% with a maximum loan to value (LTV) of 65% and a fee of £499.
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