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Offset mortgage borrowers generating outsize ‘returns' on savings

9th July 2011 Print

Over the past two years UK offset mortgage borrowers have earned £1.4 billion more on their savings than those who placed their money in best buy savings accounts, according to research by first direct.

Based on first direct's own customer data the estimated total of 460,000 offset mortgage borrowers in the UK have made a total ‘return' of £1.9 billion over the last two years, compared with only £534 million in cumulative net interest if they had alternatively invested in the equivalent best by saving accounts.

With interest rates at an all time low, finding a safe home for hard earned savings has become extremely difficult, especially for those wanting solid returns and instant access to their cash.

Over the last two years first direct has seen offset savings balances increase steadily as borrowers seek to mitigate the ongoing low interest and high inflation rates whilst protecting their savings from increasing taxes.

The direct bank has discovered that the average offset savings balance has risen by 19% (from £27,822 in Q2 2009 to £33,243 in Q2 2011) compared to a 2.5% rise in the average gross loan balance in the same period (from £127,058 to £130,186). This means the average offset saving balance is now 26% of the mortgage balance compared with 22% in Q2 2009 as offsetters seek to benefit from higher savings rates.

Richard Tolchard, senior mortgage product manager at first direct, commented: "An offset mortgage is an excellent option for those borrowers looking to benefit from a higher rate for their savings. While many UK savers are currently seeing the value of their savings eaten up by inflation as well as being taxed on the interest earned on these savings, no tax applies if they use their funds to reduce their mortgage balance. As well as helping them to pay down their outstanding loan, offsets can help shelter savers from the effects of high inflation on their hard earned savings pots.

"In the current interest rate environment mortgage borrowers could have saved thousands more with an offset in the last couple of years, even if they had diligently been seeking out the best buy savings rates."