by Mark Johnston
With high inflation and low savings rates, savers are losing money in real terms. This is further exacerbated by tax deductions.
In the current climate with base rates at an historical low, it is and has been increasingly difficult to get a decent return on savings, however savers looking for a mortgage do have an option: the offset mortgage.
Intelligent Finance believes that at least a quarter of homeowners could potentially benefit from choosing an offset mortgage. They also suggest that British mortgage holders could save approximately £850 million by moving to an offset mortgage deal.
There are approximately 249 offset mortgage products available on the market at the present time. According to Nick Robinson, the managing director of Intelligent finance: “the offset mortgage market is certainly growing”.
While it does seem offset mortgage products are slightly growing in popularity, most people find it hard to see the potential benefits they can offer them.
Offset mortgages to most sound like a complex concept, although they are actually quite simple to understand. By choosing this type of mortgage it simply means the mortgage works for you rather than the other way round.
An offset simply is a mortgage, savings account and current account all put together in one flexible package that can clear a mortgage earlier while receiving the equivalent of tax free savings.
This product is fairly straightforward, balancing savings and in some cases current accounts against a mortgage. For example if a borrower has a £150,000 mortgage and say £30,000 in savings by linking them together in an offset mortgage interest is only paid on £120,000 of the mortgage.
These mortgages can work to borrower’s advantage in two ways, either by reducing monthly payments or by keeping the monthly payments the same it will pay off the mortgage total quicker.
Another example of this would be if a homeowner with a £150,000 25 year mortgage at a rate of 3.5%, who sets £30,000 in savings against their loan and an average monthly current account balance of £1,000 could mean that they could clear their mortgage approximately 3 years and 9 months early. Effectively this would save 45 months worth of mortgage payments at around £750, equating to £33,750.
Unlike traditional mortgages who limit overpayments and do not allow borrowers to recoup the payments once made, offset mortgages allows borrowers access to the extra cash whenever they need it.
Historically offset mortgages have charged higher interest rates and fees than standard mortgages. Recent data has shown that the average rate for a 2 year fixed rate offset mortgage of 75% loan to value (LTV) is 3.24%, so the gap is narrowing significantly.
The Woolwich launched a lifetime tracker mortgage range which includes an offset mortgage, customers who re-mortgage to this product benefit from free valuation and legal fees and also no early repayment charges.
A common misconception of these products is that they are only good for those with hefty savings or the better off. While the more savings borrowers can set against the mortgage the less interest they will pay, every saver started somewhere and an offset mortgage can be a good place to begin salting away cash regularly.
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