We compare the best offset mortgage rate to other rates.
I’m going to compare the best lifetime offset tracker and fixed-rate mortgages to the best non-offset mortgages.
Offset mortgages in 100 words
Here’s a 100-word definition of offset mortgages for those who don’t know: you hold your savings, current account and mortgage with one provider. Instead of earning credit interest on your positive balances, you offset them against your mortgage, meaning you pay less debt interest.
If you’re paying 4% mortgage interest, it’s like earning 5% AER credit interest in your current and savings accounts if you’re a basic-rate taxpayer. It’s equivalent to 6.7% AER if you’re a higher-rate payer. Every penny in your accounts is getting this rate every day, so there’s no faffing with moving your funds to and from savings accounts.
The best lifetime offset tracker mortgage
There aren’t many lifetime offset tracker mortgages to compare, but the top one compares very well against any other mortgage in the entire market. It’s First Direct’s Offset Base Rate Tracker Mortgage. All the fees come to about £1,200. It tracks the Base Rate (currently 1.5%) plus 1.89%, so it’s now 3.39%.
Your credit balances will earn basic-rate payers the equivalent of 4.32% AER and higher-rate payers 5.8%. This compares pretty well with both the top cash ISAs and top savings accounts currently available. (You should consider using this year’s ISA allowance, whether or not you get this offset mortgage. Also, some offset mortgages allow you to offset ISA savings, so that you don’t lose the allowance.)
It’s not all about the equivalent savings interest you earn. Consider the bigger picture: the debt interest rate on this product is low, too.
The minimum deposit you is 20%. There are no early-repayment charges and unlimited overpayments. When you’re borrowing less than 80% of the value of the property you can pay just the interest in leaner months, provided you pay off the loan in full by the agreed repayment date.
You must open a First Direct 1st Account (a current account) - that’s necessary to offset and get a better rate. Besides, they’ll give you £100 for opening the account. Existing First Direct mortgage customers can’t get this loan.
This is the second time in a week I’ve written positive things about First Direct’s products. The HSBC banking group is, it seems, able to offer more than most at present.
Here’s how the deal compares to some different products:
Top Mortgages For An Interesting Comparison
|Mortgage description||Mortgage name||Interest rate||All fees*||Minimum deposit||Monthly repayments /Total cost over five years**|
|Lifetime offset tracker mortgage||First Direct Offset Base Rate Tracker Mortgage||3.39%||£1,200||20%||£495/£30,900|
|Lifetime non-offset tracker mortgage||First Direct Life Tracker Repayment Mortgage||3.59% (Base Rate + 2.09%)||£1,200||20%||£505/£31,700|
|Five-year fixed-rate offset mortgage||Intelligent Finance Remortgage Offset Fixed 60||5.09% for five years||£1,550||40%||£590/£37,000|
|Five-year fixed-rate non-offset mortgage||Royal Bank of Scotland Five Year Fixed Rate||4.59%||£800||25%||£560/£34,500|
*All fees including, e.g. arrangement and valuation fees, with an estimate of £250 for legal fees.
**Based on a £100,000 loan and including all fees and monthly repayments, with an estimate of £250 for legal fees. For tracker mortgages, this figure is based on the assumption that the Base Rate won’t change. It will of course.
Notice that First Direct makes it in there twice with its lifetime trackers. I chose to compare five year fixes as I was unable to find a lifetime fix or even a ten-year one. If you’re going to fix at these relatively high prices, it makes sense to me that most people fix for longer because in the short term rates will likely move downwards - although in more than a year’s time they could rise pretty quickly once the economy starts to recover.
Working out which mortgage is best for you
The interest rate shown in my table is the interest you’ll be charged on your debt. It’s not the APR. When lenders quote the APR, they include any fees in that rate as well. I decided that, for this unusual table, the APR was just confusing. I think that when comparing longer-term mortgages it makes more sense to separate the two.
Without a doubt, the best way to compare mortgages is to forget the interest rates and fees and calculate the true and total cost, which you can see in my last column. I also showed you how to work it out yourself in this article.
Although I would consider the above to be, in general, best-buy mortgages, the type of mortgage, and the precise mortgage product you should get, depends on your circumstances.
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