What are offset mortgages
Mark Parker says offset is growing in popularity
Offset mortgages are a relatively new innovation.
And as with any new type of financial product, all providers have a fight on their hands to overcome consumer lethargy and lack of financial awareness.
Nevertheless, the simplicity of the offsetting principle - that interest on your savings goes to reduce your mortgage debt - has caught the publics' imagination.
No surprise, therefore, that the market has grown from a couple of providers seven years ago to about 40 now.
And this growth may well be set to continue with market analyst firm Datamonitor predicting a sharp increase in the number of new offset mortgages over the next couple of years.
There are a number of reasons for the appeal of offsetting:
- Generally, offset mortgages offer a competitive borrowing rate
- In most instances they are very flexible. You can often overpay or underpay on the mortgage
- By offsetting the interest earned on savings against the mortgage debt, the total cost of a mortgage can be cut dramatically
- Crucially, interest paid on savings which is offset against a mortgage debt, is tax free.
The figures for how much can be saved through offsetting can be dramatic.
As an example, someone with a Ј175,000 mortgage choosing to keep their Individual Savings Accounts (ISA) and current account with the same provider and overpaying Ј50 per month into a 25-year mortgage could shave off in the region of Ј80,000 in interest, and knock almost five years off their payment term.
The majority of offset banks have online calculators that allow people to work out the savings available to them.
In the main, people with larger mortgage borrowings and savings are attracted to offset - a reflection of the built-in flexibility for those who can afford to make overpayments and who will reap more of a tax benefit from the offset concept.
It is particularly popular with City workers - who can use their bonus to drive down the interest on their mortgage whilst deciding how best to spend it.
It is also a popular product with the self employed as they save for their tax bill.
All the time they are saving to pay their tax bill whilst offsetting their mortgage. Because they earn no interest on their savings, they are not taxed.
The appeal and the irony of this is not lost to these customers.
ANDREW MONTLAKE, Partner, Cobalt Capital mortgage brokers
Andrew Montlake has reservations about offset
When offset mortgages entered the fray in the late nineties, a lot of people got carried away by all the bells and whistles.
They exclaimed that this would be how all mortgages would look in the not too distant future.
Offset mortgages allowed borrowers to do lots of different things, not least pay off their mortgages early.
Therefore there was a school of thought that they surely had to be better than conventional loans.
In the early days, however, the pricing of most offset mortgages was quite some way off the most competitive products in the market.
It often worked out better for borrowers to plump for the cheapest two-year fixed rate instead.
These days we are beginning to see more competitively priced offset products from providers.
However, the rest of the market has been slow to follow, and many lenders' offset products are still less than exciting.
In terms of the advice process, for certain borrowers offset products should always be considered as a possibility.
For example, City workers, and anybody else who receives chunky bonuses or who has sizeable savings, should look at the possible benefits of offset mortgages.
There chances are that these people will have large amounts of funds on deposit for a period of time.
Therefore they are more likely to benefit from flexible offset arrangements, such as the ability to make lump sum payments, borrow money back and, of course, offset the interest on their savings against the loan.
However most people haven't got thousands of pounds lying around in the bank and aren't really going to make use of the various benefits.
They would often better off looking for cheaper rates on more conventional mortgages, many of which have a number of flexible features anyway.
Less wealthy individuals may also wish to take out a fixed rate mortgage to protect them against possible interest rate rises.
This is not often possible with offset mortgages, as the majority still tend to be on a variable-tracker basis, where rates move with the base rate.
Offset mortgages also require a lot of discipline.
After all, if a banker has Ј100,000 in a savings pot offsetting the interest on his mortgage, but then pops out and buys a flash sports car for the exact same amount, he could be left with an uncompetitive mortgage product.
In other words, they are great in theory but often not in practice.
There is also a psychological point to consider.
For me, receiving a statement every month that represents an amalgamation of mortgage debt, savings and current account, and seeing the large negative balance would probably just depress me.
All in all, I will always look into offset mortgages for wealthier clients.
But unless they really do intend to make the most of the benefits, and have the discipline to do so, I will tend to recommend products with cheaper underlying interest rates.
The opinions expressed are those of the authors and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.Source: news.bbc.co.uk