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Monthly offset payments making savers' money work harder

3rd September 2012 Print

At a time of historically low Bank of England Base Rates, savvy savers are looking for alternative ways of making their money work for them.

And many are turning to offset mortgages to benefit from cutting the term of their home loan, reducing the amount of interest they have to repay and making their savings work harder by generating a far higher equivalent rate than typical savings accounts. Savers also benefit because offset savings are tax-free.

Figures from Yorkshire Building Society suggest mortgage holders are placing regular income into offset savings, withdrawing what they need for their outgoings and leaving the surplus to build and cut their mortgage term.

Almost a quarter (24%) of offset mortgage holders are regularly saving £200 net a month instead of depositing lump sums.

The benefits make it clear why. For example, for a 20% tax rate payer with a £150,000 mortgage at a fixed rate of 4% over 25 years, paying £200 a month into their savings would cut the term of their mortgage by two years and 11 months, save them £28,465 in interest payments and the saving rate earned is the equivalent of 5% AER tax free with no restrictions, like an ISA.

Yorkshire Building Society Product Manager Jemma Smith said: "What we are seeing is a trend for customers to pay their regular income into their offset savings and then withdrawing what they need.

"The surplus they leave behind then builds over time to reduce their total mortgage burden. If you have it, a lump sum is of course a terrific way to offset your mortgage but smaller, regular payments can be very efficient too.

"You can save as much as you want, when you want, and that is very appealing in these uncertain times.

"Savers are taking advantage of the fact that an offset does not put your money under lock and key and have instant access to your funds.

"Compared to overpayments on a standard mortgage which are often capped, can only be made a certain number of times and are not retrievable, offset is much more appealing.

"Offset rates are only marginally higher than standard mortgages, typically 0.2%, but at the current time when there is little sign of base rates getting off the floor they are very appealing."