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| Off-set mortgages – an alternative to savings? | Off-set mortgages – an alternative to savings? |
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| Pitiful interest rates on savings accounts are encouraging homebuyers to take out offset mortgages that allow those with sizeable pots of cash to cut the cost of their borrowing while keeping a nest egg for the future. | Pitiful interest rates on savings accounts are encouraging homebuyers to take out offset mortgages that allow those with sizeable pots of cash to cut the cost of their borrowing while keeping a nest egg for the future. |
| Savings rates have been hammered by the Funding for Lending Scheme (FLS), which was launched last August to encourage more lending to households and businesses. The scheme has provided banks with cheap funds to lend with, but the result has been less pressure on them to attract savers' money, leading to significant falls in savings rates. | Savings rates have been hammered by the Funding for Lending Scheme (FLS), which was launched last August to encourage more lending to households and businesses. The scheme has provided banks with cheap funds to lend with, but the result has been less pressure on them to attract savers' money, leading to significant falls in savings rates. |
| Anna Bowes, of savings website SavingsChampion.co.uk, said: "The outlook for savers in 2013 is pretty bleak, with no sign of a base rate rise in sight and the continued cutting of savings rates." | Anna Bowes, of savings website SavingsChampion.co.uk, said: "The outlook for savers in 2013 is pretty bleak, with no sign of a base rate rise in sight and the continued cutting of savings rates." |
| Last summer, before FLS was introduced, the best buy easy access account – Coventry building society's Telephone Saver – paid 3.25% gross interest a year. Rates have since fallen steadily, and the best easy access account currently available, West Bromwich building society's WeBSave Plus 3 account, pays just 2.30%. With inflation at 2.7%, as measured by the consumer prices index, basic rate taxpayers need a savings account paying at least 3.39% to gain benefit in real terms, increasing to 4.51% for higher rate taxpayers and 5.41% for 50% taxpayers. | Last summer, before FLS was introduced, the best buy easy access account – Coventry building society's Telephone Saver – paid 3.25% gross interest a year. Rates have since fallen steadily, and the best easy access account currently available, West Bromwich building society's WeBSave Plus 3 account, pays just 2.30%. With inflation at 2.7%, as measured by the consumer prices index, basic rate taxpayers need a savings account paying at least 3.39% to gain benefit in real terms, increasing to 4.51% for higher rate taxpayers and 5.41% for 50% taxpayers. |
| With rates showing no signs of improving, a number of savers buying a home or looking to remortgage are cottoning on to the fact that they could potentially improve their lot by taking out an offset mortgage. Although once niche products, offset mortgages are now widely available from a broad range of lenders, including First Direct, Woolwich, Accord and Yorkshire building society. | With rates showing no signs of improving, a number of savers buying a home or looking to remortgage are cottoning on to the fact that they could potentially improve their lot by taking out an offset mortgage. Although once niche products, offset mortgages are now widely available from a broad range of lenders, including First Direct, Woolwich, Accord and Yorkshire building society. |
| As the name suggests, this type of mortgage enables you to "offset" any savings you have against your mortgage, so that you pay less interest on your home loan while still retaining access to your cash in case of an emergency. | As the name suggests, this type of mortgage enables you to "offset" any savings you have against your mortgage, so that you pay less interest on your home loan while still retaining access to your cash in case of an emergency. |
| Mark Harris, chief executive of mortgage broker SPF Private Clients, said: "They can be useful for the self-employed, who can offset the money put aside to pay off their tax bill at the end of each year and reduce the interest they pay on their mortgage." | Mark Harris, chief executive of mortgage broker SPF Private Clients, said: "They can be useful for the self-employed, who can offset the money put aside to pay off their tax bill at the end of each year and reduce the interest they pay on their mortgage." |
| For example, First Direct offers a lifetime tracker at 2.89% above Bank of England base rate. As the base rate is currently 0.5%, this means the mortgage rate is 3.39%. A £150,000 mortgage over 25 years at this rate would cost £742.12 a month. | For example, First Direct offers a lifetime tracker at 2.89% above Bank of England base rate. As the base rate is currently 0.5%, this means the mortgage rate is 3.39%. A £150,000 mortgage over 25 years at this rate would cost £742.12 a month. |
| However, offsetting £40,000 of savings would mean the total interest could be reduced by more than £39,900 and the mortgage repaid four years and four months early. Usually any savings offset against your mortgage will be held in a savings account, although lenders such as Woolwich and First Direct also enable you to offset money held in a linked current account. | However, offsetting £40,000 of savings would mean the total interest could be reduced by more than £39,900 and the mortgage repaid four years and four months early. Usually any savings offset against your mortgage will be held in a savings account, although lenders such as Woolwich and First Direct also enable you to offset money held in a linked current account. |
| David Hollingworth, of mortgage brokers London and Country Mortgages, said: "Other lenders, such as NatWest and Clydesdale Bank, can also allow business accounts to be offset where eligible, but these will need to be in the same names as on the mortgage, so generally sole traders or partnerships. | David Hollingworth, of mortgage brokers London and Country Mortgages, said: "Other lenders, such as NatWest and Clydesdale Bank, can also allow business accounts to be offset where eligible, but these will need to be in the same names as on the mortgage, so generally sole traders or partnerships. |
| "Some, such as Yorkshire building society and Market Harborough, also enable you to link accounts of other members of the family as well, so they can help reduce the total interest charge on the mortgage." | "Some, such as Yorkshire building society and Market Harborough, also enable you to link accounts of other members of the family as well, so they can help reduce the total interest charge on the mortgage." |
| Lisa and Phil Prismall, from Honiton in Devon, took out a two-year fixed rate offset deal with First Direct in 2007, and are now on their lender's 3.69% offset standard variable rate. | Lisa and Phil Prismall, from Honiton in Devon, took out a two-year fixed rate offset deal with First Direct in 2007, and are now on their lender's 3.69% offset standard variable rate. |
| The Prismalls, who have two boys, George, 10, and Tom, eight, chose an offset deal because they would like to pay off their £120,000 20-year mortgage early, but wanted to retain access to their savings. Mrs Prismall, 40, is a self-employed print specialist working for a print manufacturing company and her husband is employed as a plumber. | The Prismalls, who have two boys, George, 10, and Tom, eight, chose an offset deal because they would like to pay off their £120,000 20-year mortgage early, but wanted to retain access to their savings. Mrs Prismall, 40, is a self-employed print specialist working for a print manufacturing company and her husband is employed as a plumber. |
| She said: "We typically have between £10,000 and £15,000 to offset, made up of savings built up over the years and my tax savings as I am self-employed. Our aim is to pay off our mortgage ahead of time, which is why an offset deal appealed. It also gives us flexibility because our savings are still there if we need them." | She said: "We typically have between £10,000 and £15,000 to offset, made up of savings built up over the years and my tax savings as I am self-employed. Our aim is to pay off our mortgage ahead of time, which is why an offset deal appealed. It also gives us flexibility because our savings are still there if we need them." |
| First Direct offers all its offset mortgages on an interest-only basis but you are free to overpay, so can effectively treat it like a repayment mortgage. The Prismalls have opted to do this, making monthly payments of £570. | First Direct offers all its offset mortgages on an interest-only basis but you are free to overpay, so can effectively treat it like a repayment mortgage. The Prismalls have opted to do this, making monthly payments of £570. |
| A First Direct spokesman said: "Should a customer decide not to do this, we impress the importance of making provision to settle the capital sum of their mortgage at the end of their term." | A First Direct spokesman said: "Should a customer decide not to do this, we impress the importance of making provision to settle the capital sum of their mortgage at the end of their term." |
| Opting for an offset mortgage can have significant tax advantages, because you don't earn any interest on savings offset against your mortgage, meaning there is no tax to pay, making this a particularly attractive option for higher and top rate taxpayers. | Opting for an offset mortgage can have significant tax advantages, because you don't earn any interest on savings offset against your mortgage, meaning there is no tax to pay, making this a particularly attractive option for higher and top rate taxpayers. |
| Hollingworth said: "A borrower offsetting savings against a mortgage with a rate of 3.19% would need to earn a gross savings rate of 3.99% as a basic rate taxpayer or 5.32% as a higher rate tax payer to get the same effective return on deposit. This rises to 6.38% if they are a 50% taxpayer. Offset accounts also leave easy access to the cash, whereas higher returns on savings accounts are often on fixed-rate bonds that can tie cash up." | Hollingworth said: "A borrower offsetting savings against a mortgage with a rate of 3.19% would need to earn a gross savings rate of 3.99% as a basic rate taxpayer or 5.32% as a higher rate tax payer to get the same effective return on deposit. This rises to 6.38% if they are a 50% taxpayer. Offset accounts also leave easy access to the cash, whereas higher returns on savings accounts are often on fixed-rate bonds that can tie cash up." |
| One of the biggest downsides of offset mortgages, however, is that they usually charge higher rates than standard mortgages, Harris said: "Offset products often have a premium attached to them, either via the rate or the fee. Accord, for example, typically charges 0.2% more for offsets over its standard products. Woolwich has a two-year tracker at 2.39% but the equivalent offset version is 3.29%." | One of the biggest downsides of offset mortgages, however, is that they usually charge higher rates than standard mortgages, Harris said: "Offset products often have a premium attached to them, either via the rate or the fee. Accord, for example, typically charges 0.2% more for offsets over its standard products. Woolwich has a two-year tracker at 2.39% but the equivalent offset version is 3.29%." |
| Can offset work for you? | Can offset work for you? |
| Those with only modest savings relative to the size of their mortgage may do better chasing a lower mortgage rate than opting for an offset deal. | Those with only modest savings relative to the size of their mortgage may do better chasing a lower mortgage rate than opting for an offset deal. |
| For example, Yorkshire building society has just launched a traditional five-year fixed rate mortgage at 2.99%, but also an offset version at 3.19%. Both deals have a £995 fee and are available to first-time buyers or those looking to remortgage with a minimum deposit of 25% of the property value, or the equivalent amount of equity if remortgaging. | For example, Yorkshire building society has just launched a traditional five-year fixed rate mortgage at 2.99%, but also an offset version at 3.19%. Both deals have a £995 fee and are available to first-time buyers or those looking to remortgage with a minimum deposit of 25% of the property value, or the equivalent amount of equity if remortgaging. |
| A £150,000 repayment mortgage over 25 years would cost £726.23 a month at 3.19% and £710.54 a month at 2.99%, so the offset deal costs £15.69 more per month. | A £150,000 repayment mortgage over 25 years would cost £726.23 a month at 3.19% and £710.54 a month at 2.99%, so the offset deal costs £15.69 more per month. |
| According to London & Country Mortgages, assuming a saver was earning 2% on their savings with a balance of £40,000, they would be £3,012 better off taking the offset 3.19% rate over the five years as a higher rate taxpayer, or £2,167 if they were a basic rate taxpayer. | According to London & Country Mortgages, assuming a saver was earning 2% on their savings with a balance of £40,000, they would be £3,012 better off taking the offset 3.19% rate over the five years as a higher rate taxpayer, or £2,167 if they were a basic rate taxpayer. |
| However, if they had only £10,000 in savings, they would be £324 better off taking the lower traditional 2.99% rate over the five years if they were a higher rate taxpayer, or £536 better off if they were a basic rate taxpayer. | However, if they had only £10,000 in savings, they would be £324 better off taking the lower traditional 2.99% rate over the five years if they were a higher rate taxpayer, or £536 better off if they were a basic rate taxpayer. |
| Top mortgages | Top mortgages |
| Chelsea Building Society | Chelsea Building Society |
| HSBC | HSBC |
| Nationwide | Nationwide |
| Provided by London & Country for the Guardian |