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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.

 
Offset mortgages: a good choice for homebuyers with savings

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.

Offset savings

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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19 comments so far. Why not have your say?

LANDLORD X

May 30, 2012 at 09:52

Beware

If the value of the property falls, the bank may confiscate your savings

Offset mortgages have a nasty sting in the tail

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Karen Davies

May 30, 2012 at 12:45

I have had a great experience with my offset small LTV mortgage and can recommend it for the 'save before you buy person,'. While saving up to buy a new car the savings kept mortgage interest payments down.

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Jonathan

May 30, 2012 at 14:31

There is an equation take the amount owed on your mortgage minus the amount of savings you would put in the offset part of it multiply this be in offset interest rate. Compare this to the interest on the competitors mortgage and subtract the income you would get on the best savings rate. You'll find that if you don't have much savings you are much better off choosing a lower interest rate mortgage than an offset one as the interest rate are usually a bit higher on offset ones.

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John via mobile

May 30, 2012 at 15:36

can you offset against savings in a cash isa?

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Karen Davies

May 30, 2012 at 15:43

I offset against a cash isa and an instant savings account

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knowsnuffink

May 30, 2012 at 17:14

I've just finally paid off my offset mortgage with Intelligent Finance, and I have to say that using this scheme is probably the best financial decision I have ever made. I only had an 80K mortgage, but I saved £30K in interest over 12 years.

For anyone self-employed like me, where you save short-term all the time to cover upcoming VAT payments or annual tax bills, there really is no better thing to do than offset this money against your mortgage interest. Because you don't actually get the interest on your savings, you get the benefit of it at gross rate, with no tax deduction - a nice warm feeling as you stay ahead of the game.

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NGR

May 30, 2012 at 20:09

I've an offset mortgage, and it works very well. Had it for about ten years, and in that time cleared one mortgage, and have moved to a bigger house and started again.

We try to pay a chunk of the mortgage each month (as if we had a repayment mortgage) which means that each month our debt is reduced slightly, and the interest we pay drops a tiny bit. You don't notice it much month to month, but over a few years you see a big difference.

We've got a number of accounts offsetting the mortgage. Our savings account, our current account and another one in which we put money to pay off our credit card. We take out interest free credit cards, and each month put the balance in the offset account. At the end of the interest free period, we pay the credit card off in full using the money we have set aside each month. We then close the credit card account and start again with a new credit card.

It has worked for us, but you need to be sure to transfer your balance every month otherwise it could be a whole world of pain.

If you're reasonably organised it is an extremely powerful way of reducing your debts as quickly as possible.

I had never intended to get an interest only mortgage, but when a broker advised me that with a repayment mortgage, your interest payments are all front ended I couldn't believe it, and said I don't want that, what are the other options and am so glad that we went interest only.

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Langers

May 30, 2012 at 21:40

I've also had an offset mortgage for more than 7 years and it works extremely well for me because my cash savings are a pretty big percentage of my relatively small (by today's standards!) mortgage.

I have both my savings account and my current account in my offset arrangement.

A particular advantage, as a higher rate taxpayer, is not having to pay tax on my savings and therefore not having to declare any savings income on my tax return. I hate paying any more tax than I absolutely have to, I pay enough tax and NI on my income as it is!!

I recommended it to a work colleague several years ago and, not only did he gain from offsetting his savings, he also found that the mortgage rate was more competitive than the standard variable rate he was previously paying (with "Howard's" building society). Offset mortgage rates didn't used to be that competitive but they're a lot better nowadays.

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HUFC

May 31, 2012 at 10:24

Off-set is the best thing we did too; base-rate tracker with Newcastle B/S for almost 7 years. It answers the question of "do I repay part of mortgage or invest savings?" You get the best of both worlds.

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Patrick Moore

Jun 03, 2012 at 12:43

I would highly recommend offset mortgages for anyone with a high proportion of savings or at the end of their mortgage for this reason. I had the capital, from my repayment plan, to pay off my mortgage with one lender and decided to take out a new offset mortgage of £75000 with another at no arrangement fee. I put the £75000 borrowed into an offsetting savings account and was paying the mortgage off at a fixed rate of £120 per month. I took the £120 per month out of my current account to pay the first month's interest leaving £75K still in the savings account which meant that the interest due was zero and the £120 reduced the mortgage loan. Next month I paid the interest out of the savings account and, as the original mortgage capital was reduced, interest was again zero so the £120 also paid off some of the mortgage. This process has been going since 2002 and I have paid off some £25000 of capital.

In the mean time I have had access to a large cash fund which I could use to make major purchases, smoothing out cash flows without resorting to loans and, given that my current account was also offsetting, I paid very little in interest; maybe £3 to £5 in any one month which meant that £117 to £115 of my fixed interest payment still went to paying off the mortgage. It is a cost free facility but you do need discipline to not blow the lot!

Unfortunately, my current provider is ageist and is terminating my mortgage when I reach 67 in three months despite the fact that I have the pension income to support the mortgage.

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Lorna Bourke

Jun 05, 2012 at 12:42

Very glad to see that clever Citywire readers have worked out even better ways of making the most of offset mortgages. Provided you don't mind juggling your money the savings can be considerable - and you retain the flexibility of being able to access your cash in an emergency. Unfortunately, as Patrick Moore points out, this all comes to an end once you are over the age of 65, or in a few cases 70. The lenders are not interested in whether or not you can afford to keep a mortgage and have sufficient pension income to make the repayments. It's all tick boxes now - even if you have been an exemplary customer and never defaulted or been in arrears.

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SL

Jun 06, 2012 at 09:55

Is this true:

I'd be seriously worried if that were the case?

LANDLORD X

May 30, 2012 at 09:52

.Beware

If the value of the property falls, the bank may confiscate your savings

Offset mortgages have a nasty sting in the tail

report this

Chuck

Jun 07, 2012 at 11:11

What landlord X says is true. Offset mortgage owners need to be wary in times of financial stress. A bank in trouble could use it to pay down the mortgage, or at the least stop withdrawal from the account.

It isn't that much different from a bank taking money from your current/savings account to pay your loan account with them. They can, and have done this.

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Prof Eman

Jun 13, 2012 at 13:22

Lorna and others

Has anyone experience or is aware of how to arrange an offset for your off spring using parents savings, to help them get on the property ladder.

Would be grateful for any advice on this.

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SL

Jun 13, 2012 at 13:46

probably just need to transfer your savings to their offset account - ( if you trust them ! )

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Chuck

Jun 13, 2012 at 15:48

@Prof Eman

Try looking for the Lloyds bank "Lend a Hand" mortgage. I think it is close to what you describe.

I believe it was discussed (promoted) in citywire previously :-)

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Chuck

Jun 13, 2012 at 15:51

@Prof Eman

Although, looking at the details, you cannot make any further payments into it:

http://www.lloydstsb.com/savings/lend_a_hand_product_page.asp

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Chuck

Jun 13, 2012 at 15:55

@Prof EMan

Or try this...

http://www.mhbs.co.uk/family_offset_mortgage.aspx

You can do this search yourself now Prof, using Google :-)

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Prof Eman

Jun 13, 2012 at 16:15

Chuck

Thank you very much for your suggestions, will be looking at them in detail.

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