Use our UK Finance guide and learn by experience. We outline pitfalls so that you don't have to learn the hard way, as many of us often do.
Mortgage
Offset Mortgage – To Offset or not to Offset
With an offset mortgage 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.
In order to calculate weather or not an offset mortgage is appropriate, an individual simple has to multiple the rate available on savings by 0.8 (or 0.6 for higher rate payers) to take into account of income tax at 20% (or 40%). If the result is higher than the mortgage interest rate, you would probably be better off without an offset mortgage loan. Even then the offset mortgage loan may be appropriate for borrowers wishing to take advantage of the flexibility that offset mortgages offers in terms of overpayments and payment holidays.
With rates coming down this scenario is becoming more likely, but even if the difference between the rates available drops to 0.5%, a higher rate taxpayer with £100,000 could need to hold £20,00 in savings to put himself in the same position as the regular mortgage lender.
There is no doubt that the general public is fast becoming more aware of offset mortgages and their market share should increase in line with a greater understanding of what they can offer.
The rates are higher than those available through mainstream mortgages but offset mortgage loans typically have lower fees and because of their flexibility carry lower penalties which can go some way to countering the higher interest. Higher rates may be becoming less of an obstacle anyway as First Direct and Clydesdale Bank have cut rates in recent months, the Scottish bank now offering a two year fixed deal at 4.65%. further new offset mortgage ranges are being introduced all the time, and competition means that providers will pare the rates down as far as possible.
