Should you go for an offset mortgage?

by John Fitzsimons on 13 August 2010  |  12 comments
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Offset mortgages can shave thounsands of pounds off your mortgage, as well as cutting the eventual mortgage term, but are they worth the premium you'll pay for them?

Today's debate is on offset mortgages, a form of mortgage which allows you to use your savings to drastically reduce the portion of your mortgage that you will pay interest on. However, they are not exactly the cheapest deals around.

We asked Andy Gray, head of mortgages and savings at Barclays, and Nick Cooper, mortgage advisor at lovemoney.com, to review the case for and against going for an offset mortgage.

Andy Gray, head of mortgages and savings for Barclays

Offsets are invaluable!

Possibly the biggest myth that still surrounds the offset product is that it is only applicable for the 'super rich'. This may have been the case in its fledgling years when there was a premium to be paid with borrowers needing approximately 20% of their loan amount in savings to realise the full advantages of the product.

However, as offsetting has moved away from its niche position and become more mainstream, there are a number of scenarios to suggest that a consumer may only need a minimum of 5% of their mortgage balance in savings to achieve material benefits.

This statistic alone opens up a number of doors to the types of borrower for whom this product could be an ideal fit.

Cutting mortgage debt

Put in its simplest terms, an offset deal combines mortgages and savings in a single account, allowing the mortgage to be offset by a credit balance, which can reduce the overall interest charged.

The principle is simple - most mortgage borrowers also have savings, even if they are small, and using this money to cancel out mortgage debt makes perfect sense in a variety of scenarios. Savers avoid paying tax on interest that their deposits would otherwise have earned. And because offset mortgage lenders calculate interest daily, every pound on deposit works hard to reduce the cost of borrowing.

This can make it applicable for first-time buyers through to professional portfolio landlords; from new families looking to remortgage to home owners simply looking to pay their mortgage off before retirement by drastically reducing the mortgage term.

Low bank base rate

Offset has become even more attractive to savers of all kinds because of the historic lows in interest rates, which in turn inevitably means low savings rates. By using savings in an offset mortgage arrangement, financially savvy customers can make their savings work harder and help lower the amount of interest being charged on their mortgage and use this to either reduce their monthly payments or greatly reduce the term of their mortgage.

It will also have a more immediate impact for those higher rate taxpayers who possess a high level of savings, as the offset benefits could be significant to help balance this shortfall in earnings.

Tax efficient

Offset is still being applauded as the most tax-efficient product on the market and rightly so, as more and more consumers are recognising the benefits offered by this way of borrowing. What remains the most important thing on offset provider's agendas is to continue educating consumers about the product and how it can be of benefit in a number of situations and scenarios.

It is also vital to underline that offset does require an element of financial discipline and of course this means that it will not be appropriate for every borrower. However, in these continued times of financial uncertainly it is important for borrowers to make their money work as hard for them as possible and offsetting can genuinely provide an ideal vehicle in which to be able to do this and provide a fast track to many people's ultimate goal of becoming mortgage free.

Nick Cooper, mortgage advisor, lovemoney.com

Offsetting – no thanks!

The first downside of an offset mortgage is that it is generally more expensive. 

Most lenders will charge between 0.2% - 0.5% more on the interest rate, which dependant on your mortgage balance, can work out to some serious money, if you’re not going to use the offset to its full potential, you’re better off choosing a standard tracker or fixed rate.

Only if you’ve got some cash in the first place!

One of the main reasons for my clients wanting an offset is because they want to use their savings to offset against their mortgage balance. This is a great way to earn a good rate on your cash in a tax efficient way.

However, offering up the contents of your piggy bank to your offset account is not going to save you heaps in interest. Bearing in mind you are already paying a higher rate, you may have been better off with a standard mortgage and separate savings account.

Related goal

Cut your mortgage costs and pay off your mortgage early

Find out how to cut the cost of your mortgage by hundreds of pounds a month and become mortgage-free years earlier.

Do this goal

Make sure you sit down and do your sums with your mortgage adviser to check that you’ve got enough savings to making a saving with your offset.

Only if you’ll exceed 10% in overpayments!

Another reason for my clients wanting an offset mortgage is because they want to be able to make regular monthly overpayments to reduce the interest charged and reduce their term.

However, very few plan to, or can, overpay by more than 10% of their balance each year. The majority of lenders allow clients to overpay up to 10% per annum without incurring a penalty as standard, so why pay a higher rate on an offset when you can fulfil your overpayment desires with a standard, cheaper product? 

Access to your money.

Offsets allow clients to retrieve their money as and when they need to, which is very important for some. However if you decide against the offset do not fear - some lenders now allow clients to borrow back monies they have overpaid into their mortgage. Although the mortgage balance will increase inline with what you are claiming back, there is no charge for this service.

Alternatively most lenders that offer this facility also offer the option to underpay. This basically means you can either cease paying or reduce your mortgage payment until your overpayment is used up. For example, if your mortgage payment is £500 and you have overpaid by £1,500, you can have the next three months off from paying your mortgage.

Both of these options will be subject to your current status and the lender’s criteria, so make sure you keep up with your payments and you should be fine!

Do you really want to borrow more?

Some offsets allow clients to borrow additional funds as and when they like, similar to having a very large overdraft, plus you can normally borrow back whatever you have paid off since the start of your mortgage. But if you have spent the last two years being strict and paying down your mortgage, do you really want the temptation to put yourself back to square one again?

If you are going to have this facility available make sure you use it for the right reasons.

So what do you think? Are offset mortgages worth paying a premium for?Let us know your views via the comment box below.