The onset of offset

Competitively priced offset mortgages mean they dominate the mortgage landscape in many countries, but in the UK it has traditionally been a different story - until now.

The simplicity of having your current account and mortgage with the same provider is attractive in itself. Having that linked current account working harder for you than savings accounts adds to that appeal.

With offset mortgages now being offered at less than three per cent - and the savings component adding a tax-free three per cent in value too, the offset mortgage could become a boom product.

Louise Cuming, head of mortgages at moneysupermarket.com, said: "In a world where it is increasingly becoming the norm to have financial products with at least six different providers, it's nice to see well-priced offsets potentially reducing that spread.
"Offsets are simple and reduce the complexity of hunting around for a high-interest current account and a low-interest mortgage.

"There is no doubt if lenders price their offset mortgages competitively then people will flock to them.

"To know your money is working for you while it sits there in your current account is a great feeling - particularly at a time when savings rates are so poor."

First direct's offset Base Tracker currently has a rate of 2.89 per cent, meaning a typical borrower with a £100,000 mortgage and £7,000 in savings would pay out £11,350 on the mortgage and owe £94,700 at the end of two years. The savings, while staying at £7,000, would have helped reduce the amount owing on the mortgage by £415.

In contrast, a two-year fix from RBS at 3.49 per cent and a Lloyds current account with Vantage at four per cent would have that same borrower paying out £12,800 and owing £94,800 after two years. The interest from the Lloyds account, less basic rate tax, would be around £450.

Louise Cuming added: "Under this scenario, a borrower would be £1,100 better off with the first direct tracker, assuming the rate stayed at 2.89 per cent.

"It shows how easy and attractive that offset mortgages can be - if lenders price them appropriately.

"The RBS fixed-rate is an excellent one - and Lloyds Vantage is a great current account, but first direct's offset mortgage is throwing down the gauntlet to all other lenders."