What is an Offset Mortgage
The offset mortgage idea is really quite simple. Borrowers cash savings are set against their mortgage debt, so they pay interest only on the balance. But monthly mortgage repayments are calculated on the full debt, before offsetting is taken into account. So borrowers effectively overpay on their debt each month.
That means the mortgage debt is cleared much faster than with a conventional loan. And borrowers benefit from not paying tax on the interest they would otherwise earn on their savings.
Here is offset mortgages explained with an example.
A borrower with a £100,000 mortgage paying Intelligent Finance’s offset tracker loan rate of 5.24% would save more than £39,000 interest over the life of the mortgage by offsetting £20,000 of savings. They would also pay off the loan five years early, based on a traditional 25 year mortgage.
About a quarter of mainstream mortgage lenders have offset deals. There are current account mortgages, such as the deal from One Account, backed by Royal Bank of Scotland, that allow borrowers to offset a current account balance as well as their savings against mortgage debt. In total, offset and current account mortgages make up about ten% of the home loans market.
Many offset deals have interest rates that track the Bank of England base rate, but it is possible to get an offset loan with a fixed or capped rate.
Offset loans are flexible, so borrowers may pay off capital without penalty, underpay and take payment holidays, provided they have made sufficient overpayments throughout the year.
Of course, there is a catch. Offset mortgages have higher rates than traditional deals, so borrowers pay a premium for the flexible features. For this reason, they are not the best option for everyone. And statistics suggest they are not always popular among consumers.
According to mortgage broker John Charcol, only one% of borrowers opted for an offset loan last month, compared with one in five who took base rate tracker deals and 18% who chose low two-year fixed deals.
James Cotton, a mortgage adviser with independent broker London & Country in Bath, Somerset, says that higher rate taxpayers need at least £10,000 in savings to offset against a £100,000 mortgage to make an offset deal better value than a traditional mortgage.
Cotton says: ‘Rates on offset mortgages have fallen in recent years as competition has increased, but they are still higher than best-buy mortgage rates.
‘Borrowers need to do some number crunching and think about whether they will make full use of the flexible features. ‘For many, it will be the case that they would be better off chasing the lowest possible mortgage rate.’
Ray Boulger at Charcol says that although offset mortgages probably will not suit most buyers, some have attractive features. ‘Some will allow you to offset multiple savings accounts and current accounts,’ says Boulger.
‘There are also family offsets from Yorkshire and Newcastle building societies, which enable parents to help their children get on the property ladder.
‘Parents can use their savings to offset against the mortgage and bring their children’s monthly repayments down, but they still have access to the money if they need it back.’
Business development manager Mark Pittaccio, 42, from Baldock, Hertfordshire, has had an offset mortgage for six years. He says it has enabled him to renovate a property, buy a car, start a business and help with tax planning.
‘It is the flexibility of offset that appeals,’ says Mark, whose wife Jan, 42, is a medical researcher. The couple have an 11-year-old daughter, Kate. ‘I first took an offset loan with First Active in 1999 because I was doing up an investment property,’ says Mark.
‘I remortgaged to release some equity, but then paid some of the cash back immediately. That way, I could then draw down the funds as and when it was convenient as the renovation progressed.
‘In contrast, with a traditional mortgage I would have had to remortgage in one stage to release all the funds needed for a renovation, paying interest on the whole sum from day one.’
Mark remortgaged from First Active to Intelligent Finance’s offset loan two years ago and admits that the rate he pays, 5.7%, is higher than some of the best two-year discounted and fixed rate deals available. But he believes it is worth paying the premium for the benefits he gets.
‘I love the flexibility of an offset loan,’ says Mark. ‘Jan is due to give birth and wants to take some time off work so I’ll probably pay a chunk off the mortgage to bring down our monthly repayments so we can manage on a lower income. There won’t be any penalty for doing that.’
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