Three reasons to go for an offset mortgage
By Chris Gilchrist 18th
December 2007
Offset mortgages continue to become more popular. There are three main reasons why
you should consider switching to this type of loan.
The main advantage of the offset mortgage is that by combining your savings and
mortgage you earn interest on your savings at the mortgage rate. Say you have a
£100,000 mortgage on which you pay 6.5%.
You also have £20,000 of savings on which you earn 4.2% net of tax (6% gross). So
you receive £960 a year in net interest and pay £6,500, leaving you with an overall
net cost of £5,540.
Compare the best offset mortgages here
Offset advantage 1: Save money:
Combine your home loan and your savings in an offset mortgage and you get no interest
on your £20,000, but you only pay mortgage interest on £80,000 (£5,200).
That means you are £240 a year better off. If you paid higher rate tax, you would
be £580 a year better off.
The more savings you have, the better off you will be with an offset mortgage.
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Offset advantage 2: Pay what you like
With an offset mortgage, you have a maximum loan. Let's say it is £100,000, and
you have £20,000 of savings. Then if you want to, you can simply take monthly mortgage
repayments from your savings - you can have a 'repayment holiday'.
You can also pay in as much extra as you like on a regular or lump sum basis. It
won't 'pay off' the loan, but by adding to the savings you hold, it will cut the
outstanding mortgage balance on which interest is calculated, so it comes to the
same thing.
Contact a mortgage broker with the MyMortgageKey service
Offset advantage 3: Flexibility
With an offset loan you agree a maximum mortgage- in the example above it would
be £100,000. You can then pay off some of it and then re-borrow up to that maximum
figure, no questions asked.
This flexibility could allow you to pay off, say, £30,000 of that initial £100,000
loan, and then re-borrow it to add an extra bedroom to your home. If you pay off
a conventional loan and then formally borrow again, you may incur all sorts of charges
and fees, none of which apply on this kind of use of an offset loan.
Moreover, with credit conditions tightening every day, you may find it hard to obtain
the loan you want in future, especially if your circumstances have changed. So agreeing
a large mortgage borrowing limit now- even if you don't fully use it- could prove
useful if credit conditions stay tough.
Compare the best offset mortgages here
More offset loans available now
A couple of years ago there was a premium of about 0.75% for offset mortgages, but
today it's down to 0.25% and maybe even less on selected deals.
One of the best offset offers right now is from First Direct, which has an introductory
rate of 4.99% for two years, followed by its standard rate (currently 6.5%). Scottish
Widows offers base rate for two years (5.5% currently) followed by 6.5%.
Both these offers have high fees of over £1,000, but if you want a low-fee deal,
brokers L&C have an exclusive offset loan at 5.84% (base rate + 0.34%) for two years,
followed by 6.5%, with no upfront fees.
From nowhere a few years ago, offset mortgages have soared in popularity and now
account for about 10% of all new mortgage lending. Most offset loans are organised
via mortgage brokers rather than direct, possibly because of the subtle 'small print'
differences between them. That means it's more difficult to compare them than it
is standard mortgages.
Personally, I made the switch to offset three years ago and can't imagine I'll ever
go back to a conventional mortgage.
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Article produced by EveryInvestor.co.uk
