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Is an offset for you? Offset mortgages are rarely promoted but offer concrete advantages well worth checking out.
Introduced to the UK market in 2000 by the Woolwich, offset mortgages grew quickly to around 5% of all mortgages, then fell back to around 1%, where they have languished for many years, despite offering obvious advantages. Amongst more sophisticated borrowers they should, logically, be much more popular, but suffer from a fatal marketing flaw: they sound complicated.
Arguably the simplest arrangement
With an off-set mortgage, interest is paid on the net amount owed, after adding your mortgage and savings together. It’s thus arguably the simplest arrangement possible.
In this way, money you have in a linked savings account, is set off against the total amount owed, reducing your interest payable. Because interest is normally calculated every day, cash amounts you might hold even for a short time, can produce significant reductions in interest. In turn, this means that more of your fixed monthly payment goes towards repaying capital – and your mortgage gets paid off earlier, saving months, perhaps years of interest payments. This is especially true if you often have substantial amounts of cash at bank as, for example, self-employed people putting money aside for tax bills, often do.
A key advantage of an offset mortgage is that the cash benefit – i.e. interest earned – of having money in a savings account is not taxed. It all goes towards reducing your overall interest payable on your mortgage – and even HMRC cannot tax a reduction in costs. For higher rate payers, this means savings linked to an offset mortgage at, say, 2.03%, are producing a benefit equivalent to 3.38% from a regular, taxable, savings account.
Lowest ever premium
Perceived complexity aside, a bar to the popularity of offset loans used to be the premium charged over standard rates. That premium is now smaller than it ever has been. For example, for one client, we have recently arranged a £1,250,000 loan at just 0.18% over the standard alternative.
A non-withdrawable, ‘free’ facility
Interestingly, that same client has no intention of using £250,000 in the near future. Instead, he will be placing all of it in the linked remortgage savings account, hence the interest payable will completely offset the interest due. What he has, though, is a 20 year facility, with interest fixed for five years at just 2.03%. It will slowly reduce (as the loan is repaid) but, unlike a standard loan facility with a bank, cannot be withdrawn. For anyone facing uncertain times – and mindful of the adage of a banker being someone who lends you an umbrella, only to want it back when it is raining – an offset mortgage can secure important freedoms, at low, containable cost.
A simple facility
The core simplicity of offset mortgages was highlighted by another recent client, looking to invest in property. Borrowing against the investments would have been impractical and costly, especially to purchase. Instead, borrowing £1.6 million on a £3.2 million house, we arranged an offset mortgage fixed for five years at just 2.03%. This was well under half the rate payable on alternatives considered by our client, who now has the funds to invest at will. Better still, whilst the client has vastly more than the £85,000 protected by the Financial Services Compensation Scheme sitting in a bank account, the FSCS has ruled that, in relation to offset mortgages, it is the net amount that counts – so there is no vulnerability.
Set for growth?
Ironically, it is perhaps the great flexibility of offset mortgages which makes their benefits less easy to define and explain. For broker and client alike, fixed terms and amounts per month are much clearer than, say, the value of peace of mind, or of being able to move fast to secure an investment. What is clear, though, is that peace of mind is commanding a growing premium, just as the premium charged for offsetting, relative to a standard mortgage, is lower than ever. With lenders keen to increase overall volumes as well, we expect the number of offset mortgages to grow and for them to account for a higher proportion of all mortgages – with good reason.
Your home may be repossessed if you do not keep up with repayments on your mortgage