An offset mortgage could save you thousands of pounds in interest costs
Offset deals are seen as complicated and only suitable for those with large savings balances. Both of these assumptions are wrong, says Andrew Hagger
If you have a separate mortgage and savings account, it may be worth combining them. You could save thousands of pounds in mortgage interest costs and at the same time reduce the term of your home loan
Choosing an offset mortgage from a bank or building society can prove a smart move for borrowers, especially in today's austere climate for savers. With rates on even the very best instant access and one-year savings accounts struggling to break 1.30 per cent, many people would gain by offsetting their nest-egg against mortgage balances that, in many cases, cost more than 3 per cent.
Another important feature is that offsetting provides flexibility – you always retain access to your entire savings balance in case you need to dip into it at a later date.
Although many standard mortgages let you make limited overpayments of up to 10 per cent a year, once you've committed to the overpayment then you can't get that money back if you were to need it again some time in the future.
However, there has been a limited demand for offset deals and the main reasons are that they're seen as complicated and only suitable for those with large savings balances. Both of these assumptions are plain wrong.
A further issue is that not all lenders offer the facility, and so some customers are missing out because they aren't even given the option.
Along with Barclays and First Direct, Yorkshire building society is one of the main players in the offset market and, unlike some rivals, it allows the approach to be used on its entire range of standard mortgage products with just a 0.2 per cent loading on the interest rate.
Offsetting is available across a wide range of loan to values (LTVs) with some of the top deals as follows: First Direct – a two-year fixed rate of 2.49 per cent, with no fees, available to those borrowing 60 per cent LTV; Yorkshire building society – a two-year fix of 2.89 per cent, with a £345 fee, available up to 75 per cent LTV; and Barclays – a "lifetime offset tracker" at 2.49 per cent, with £999 fee, up to 75 per cent LTV.
To give you a taste of the savings you can achieve with an offset – and to prove it is a viable option for those with fairly modest savings, or those who intend to save on a regular basis – look at these numbers.
For someone with savings of £7,500, offsetting this balance against a £100,000 mortgage at 3 per cent would save interest charges of £7,753 and take one year and four months off the term of a 25-year mortgage.
You don't need a huge lump sum to benefit from an offsetting deal; regular savings will work too.
For example, if you are able to put aside £200 a month to put into your savings account, you will save £17,159 in mortgage interest charges and cut three years from the length of your 25-year mortgage plus. You will also end up with a savings balance of £52,800 when the mortgage is repaid.
In the past, people have chosen a standard mortgage without really giving it a second thought. However, with a wider choice of competitive offset options – and savings accounts offering such poor returns – it's time more borrowers took advantage of the financial benefits that offset can deliver.
Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk