Slash years off your mortgage

Find out how to slash years off your mortgage term!

The current climate has created the perfect conditions for offset mortgages. In fairness they have always offered huge benefits to borrowers who want to make their money work harder for them.

But in the last year those advantages have been brought even more sharply into focus and the number of borrowers applying for offset deals has risen significantly according to lenders.

But why now?

Meagre savings rates

The Bank of England Base Rate has been at its record low of 0.5% since last March. Many savings rates have been slashed since then making it extremely difficult to get a positive rate of return on your hard-earned cash, especially after tax is taken into account.

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After all, you need to find a rate that beats inflation after tax has been taken into account, or your hard-earned cash will be losing value in real terms. Last week financial information provider Moneyfacts noted that only 20 savings accounts could beat inflation for basic rate taxpayers, and only one account for higher rate taxpayers.

So it’s no surprise that people are increasingly using some or all of their savings to pay down their mortgage debt. And an offset lets you do it while keeping your savings in a separate pot that you can still access.

How does it work?

Offset mortgages join up any money you have in credit, like your savings, with your mortgage. Then it works out the best rate of interest for you to be charged on the overall balance.

For example, you might have a £100,000 mortgage that you pay a 3.5% interest rate on, and £15,000 in savings that you earn 0.5% interest on (and then that interest is taxed!).

It would make more sense for you to simply pay interest on £85,000, saving 3.5% interest on £15,000, rather than earning 0.5%. You save the interest at the higher rate and earn nothing on your savings.

And if you ‘effectively’ overpay all your money in credit into your mortgage by offsetting (although it actually remains in a separate pot), you owe your lender less, so you are charged less interest on your debt.

This helps you chip away at the debt more quickly, since the interest is accounting for less of your monthly repayment each month. The cumulative effect of reducing your debt and then owing less interest can literally save you thousands of pounds and cut years off your mortgage term.

With some lenders you can choose between reducing your mortgage term or reducing your monthly mortgage payments.

For example, according to Yorkshire Building Society, a customer with a £100,000 mortgage repaid over 25 years at 5% interest, would pay £528 per month.

However, if they had £10,000 of savings offset against their mortgage and continued to pay £528 per month then they could pay off their mortgage two years and five months early and still have their £10,000 in savings.

Or they could use the £10,000 to reduce their monthly payment to £475 per month over the 25 years, saving nearly £16,000 over the term of the mortgage. 

Easy peasy

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As well as poor savings rates making offsetting more appealing, the fact that mortgage rates have fallen also makes it easier for many people to do.

If you are lucky enough to be on a variable or tracker rate you have probably seen your monthly repayments fall significantly since the Base Rate dropped to 0.5% last March.

This means you have extra cash in your pocket each month, so why not put it to good use by overpaying your mortgage? After all, you have been used to paying a higher amount anyway, so just stick with it.

The beauty of an offset means that you don’t need to literally overpay that money into your mortgage. You can simply leave the extra in your savings pot and the lender will do all the offsetting calculations for you. Your cash remains separate to your mortgage -- and accessible.

Plus there are even more benefits to offsetting now.

Open up more deals

By paying down your debt more quickly you are building up an equity buffer in your home.

This reduces your loan-to-value ratio -- your mortgage as a proportion of your property’s value -- which is really important, since the more equity you have the more remortgage options you will have in the future. Mortgage lenders offer their best deals to those with the most equity so it can be extremely smart to reduce your debt and up your equity while you can afford to do so.

Plus because you will be ahead on your mortgage repayments you may be able to take a payment holiday in the future if things start to get a bit more difficult. As well as offering you the potential to save thousands of pounds, offsets give you a safety net should you hit hard times.

Offsets offers the ultimate in flexibility and a combination of conditions have blended to produce a perfect cocktail for those who want to make the most of their money right now.

Here are some of the best deals available:

10 fab fixed offsets

*0.24% discount off the rate if you take the lender’s home insurance

15 fantastic variable offsets

More: Free online banking tool | Landlords: Cut your tax bill! | You’re destroying the value of your home!