The Offset Mortgage is growing in popularity as savers continue to struggle to find a good return on their money. Interest rates on savings remain at around 1% which means home-owners could benefit by combining their savings and mortgage balances. Offset Mortgages currently only account for 10% of the UK mortgage market. Are borrowers missing out?
An Offset Mortgage links your savings account with your mortgage and effectively allows you to pay less interest on your mortgage by taking zero interest on your savings. Home-owners keep their savings in the offset account and the balance is subtracted from your outstanding mortgage. You don’t earn interest on the savings, but you only pay interest on the remainder of your mortgage balance.
What is an Offset Mortgage?
An offset mortgage product links your savings account – and sometimes your current account too – to your mortgage. You are required to hold all of these with the same bank or building society and rather than earn interest on your savings (and possibly, current account balance) you pay a correspondingly smaller amount of mortgage interest. You sacrifice the interest that would be earned on your savings in return for smaller monthly mortgage payments. As an example, if you had £25,000 in savings and a mortgage of £200,000, you would pay mortgage interest on £175,000 only (and receive nothing on your savings.) This allows you to reduce the amount of interest you will pay on your mortgage overall, and allows you to pay it off in less time.
This type of mortgage is both flexible and tax efficient. While many standard mortgages will allow you to make overpayments, once you’ve paid the money you can’t get it back. With Offset Mortgages, you retain access to your entire savings balance in case you need to dip into it – effectively allowing you to borrow at the main mortgage rate, against your property. They are also very tax efficient, as most non-ISA savings accounts are subject to income tax on interest earned. Offset Mortgages are suitable for all types of borrowers, particularly those with a large savings pots and annual bonus schemes.
The BOE Base Rate remains at a historical low, and is likely to do so for some time. This means that interest rates on even the very best savings accounts are sitting at 1% or less. With mortgage interest rates far above this (around 3%) it makes a lot of sense to go with an offset mortgage at this time.
Comparing The Market
You will find that offset mortgages also come in a range of types, including variable and fixed rates. They tend to require a minimum deposit of 25% and will often require a higher proof of earning. Look for those with the lowest interest rates and fees, and compare the overall APR. Look for products which offer additional benefits, such as the chance to link your current account and ISA too, so that your money is working as hard as possible. Remember that with an offset mortgage, your accounts will all be with the same provider.
Accord Mortgages, part of Yorkshire Building Society has recently launched a range of 5 year Offset Mortgages. The deals are available for both home buyers and remortgage customers with deposits of 15% or more.
The range includes a 2.49% five-year offset at 75% loan-to-value. For those looking to borrow more, there is a competitive 2.59 per cent option at 80% LTV, or available at 85% LTV is a 2.69 per cent deal. Each mortgage comes with a £995 product fee.
The Chelsea Building Society is offering an Offset Mortgage at 2.25% at 75% LTV. The fee’s are more expensive at £1,695 but the deal comes with add ons such as a free valuation for all borrowers, free legal fees for those looking to remortgage and £250 cashback for house buyers.
The Coventry Building Society is offering a 2.25% five year Offset Mortgage based on a 75% LTV. This is available as a remortgage customers and comes with arrangement fee’s of £999. Also on offer is a 2 year fixed deal at 1.89% based on a 75% LTV. The same fee’s of £999 apply to this deal.
Fixed Direct offer a 2 year fixed deal at 1.64% based on a LTV of 75%. The interest rate reverts to 3.69% at the end of the 2 year period. Arrangement fee’s of £1,450 plus a valuation fee of £227 apply to this offer.
Yorkshire Building Society have a number of excellent 2 year fixed Offset Mortgage deals aimed at First Time Buyers. For those with a deposit of 35% (LTV of 65%) they offer a rate of 1.41% with a completion fee of £1,495 and a valuation fee of £205. For those with a smaller deposit of 15% (LTV of 85%) they offer a 2 year fixed Offset Mortgage deal at 1.74% with a completion fee of £995 and a valuation fee of £205.