Offset Mortgages
Offset mortgages are where the interest on your mortgage is reduced by the funds in both your savings accounts and your current accounts.
The more you have in your savings account, the less interest you pay on your mortgage, which helps you to repay your mortgage faster and
more cheaply in the long term. Your part of the deal is that you don't receive any interest on your savings or your current account.
Fashion and mortgages are not normally words that appear in the same sentence, but occasionally a product emerges that adds a spark to the
market, that becomes 'the new black' as far as the industry is concerned. A few years ago, that product was flexible mortgages (and in the
future Gordon Brown would like it to be long-term fixed rates), but for the past couple of years it has been the offset mortgage.
Offset deals work by setting the money held in savings and current accounts against your mortgage debt. So instead of earning interest on your
cash balances, you pay less interest on your borrowings. With a £100,000 mortgage and £10,000 in current and savings accounts, you pay interest
on the difference of £90,000.
The idea of offsetting is that, with less interest to pay, the mortgage is paid off more quickly and as a result costs you less. For example,
according to Emma Keens, spokeswoman for Woolwich, someone with a 25-year repayment mortgage worth £80,000 and £5,000 in savings, paying an
offset rate of 4.35 per cent, could pay off their loan two years and eight months earlier. This would save them £9,013 in interest.
The main advantage of this is that with base rates low at the moment, savings rates are quite abysmal. So rather than working to give you a
small amount of interest, your savings work to cut down your mortgage payments and repay your mortgage faster. In fact, Intelligent Finance
claim that there are some customers who have such a high level of savings that they do not pay any interest at all on their mortgage borrowings.
Advantages of Offsetting
All your other debts, such as your credit cards or your personal loans are also linked into the nest of products, and this allows you to repay
all of your debts at the mortgage rate, which is likely to be a lot lower than your pay rate on those borrowings. A further advantage is that
the credit cards and loans remain unsecured borrowings even though they are paid off at the mortgage rate, so if you can't keep up the
repayments on those your home is not at risk.
Clearly, there are strong similarities between offset and current account mortgages. The difference between them is merely technical, according
to David Hollingworth, of mortgage Advisers London & Country Mortgages. But the fact that the mortgage account and savings are held in different
pots, rather than being amalgamated, can make them more palatable for many borrowers.
Like current account mortgages, offset products generally come with flexible features like daily calculation of interest and the facility to
make overpayments and underpayments, to take payment holidays and to draw down cash. However, as with other flexible products, the details of
these features vary from lender to lender. For example, Newcastle Building Society's offset mortgage does not allow underpayment or payment
holidays, or offer a drawdown facility. Some other lenders only permit these once borrowers have built up a reserve of overpayments.
The UK population is turning to offset mortgages in greater numbers the more time goes on. Since you can see all of your savings and debts in
separate accounts even though they work together, people feel safer with them. This is unlike a current account mortgage, where your accounts
are mixed together as if you have one massive overdraft.
Possible Features
As offset mortgages become more mainstream, lenders are becoming more ingenious in the features they attach to them. Newcastle Building
Society's offset mortgage and Woolwich's Openplan mortgage both have a family offset feature, allowing people to link their savings to a
relative's mortgage.
At Newcastle Building Society, spokesman Rik Kendall explains that this facility provides a way for parents or other relatives to help their
children financially, without losing access to their own funds. This makes it an attractive way of helping first-time buyers and young borrowers
onto the property ladder. The arrangement does not have to be permanent, making it feasible for parents to link a savings account for a period
of time - for example while they are deciding what to do with a windfall, or while a child's finances are stretched by maternity leave or
unemployment - and then unlink it later on.
The extent of your (or your relatives') savings is one key factor in determining whether an offset loan is appropriate for your circumstances,
but there are other things to consider. One is what else you might do with your savings if you are not offsetting them. For instance, anyone
expecting a stock market boom might not want £20,000 capital sitting in a savings account and not growing. This is a decision to make in
conjunction with a financial adviser, rather than a mortgage adviser.
Essentially, it's like emptying your savings into your mortgage account in order to pay it off, without losing the easy access to the funds.
By mid 2006, it is expected that offset mortgages will have won 25% of the mortgage market.
The people that will find offset mortgages very suited to them are people with volatile incomes, such as the self-employed or people often paid
in large bonuses. People with significant amounts of savings will also find offset mortgages useful.
If you do opt for an offset mortgage, especially one linked to a current account, you can maximise its benefits by keeping your cash in your
account for as long as possible each month. With interest calculated daily, each day's credit balance can make a small difference. Check, for
example, if it is possible to change direct debits or standing orders to a date later in the month, or to pay bills such as credit cards a few
days later - ensuring, of course, that you don't pay them too late and thereby incur extra interest.
