Offset opportunities make sense for savers

Offset mortgages are suitable for more borrowers than people may think, according to new figures.

Statistics from moneysupermarket.com show that for savers with £14,000 put away, an offset mortgage could be the best choice as this would allow them to negate the effects of at least the next two base rate rises. This research dispels the view that the savings needed to make an offset product applicable are prohibitively high.

Contrary to popular belief, offset mortgages can be fairly straightforward. A homeowner’s money held in a savings or current account is ‘offset’ against the money owed on a mortgage. The overall debt is reduced and consequently the amount of interest applied to the reduced loan. For example a borrower with an offset mortgage from Intelligence Finance with a £150,000 remortgage on a £200,000 property would effectively reduce the rate by 0.5 per cent if they offset it with £13,761.00 in savings.

Louise Cuming, head of mortgages at moneysupermarket.com, said: “Taking a holistic view to mortgages and savings can be a much more effective way to manage borrowing. Though they may not realise it, many households looking for a new mortgage would be better off with an offset mortgage, and yet offset mortgages only account for a minority of the market. Unfortunately the majority of customers tend to go back to what they understand – cheap short term deals.

“However, offsets look set to grow in popularity. With more than 30 providers now offering offset products and the required level of savings no longer prohibitive, I believe many more people are going to be converted.”

Because the concept is so different, people should understand choosing an offset lender becomes more about the features of the product than simply the rates. For example - The One Account allows loans, credit card borrowing and mortgage borrowing all at the same rate and this may suit the requirements of a borrower who may at times rely on unsecured lending which, if they had to go to the loans market in general, would likely be at a significantly higher rate than the One Account.Elsewhere Intelligent Finance has a Cash ISA that can be used to offset mortgage interest, and Clydesdale Bank allows up to six current accounts to be ‘offset’ alongside the mortgage. Offset mortgages come in a variety of shapes and sizes to suit the varied circumstances of applicants.

In addition, by using the flexibility of an offset mortgage alongside a current account borrowers can benefit from salary deposits. They should make all household purchases on a credit card (either on a card with 0 per cent for purchases, or by making sure that the balance is paid off before any interest starts to accrue), and then the salary credit can stay in the current account until the credit card balance needs to be paid. For a couple earning £2,500 net each a month, this could reduce the interest rate they paid with Intelligent Finance by over 0.15 per cent, just by using their funds more effectively.