If you're a homeowner with savings, you could cushion yourself from higher interest rates by choosing an offset mortgage. These mortgages, which take a holistic approach to your finances, are becoming increasingly popular. Put simply, any savings you have reduce the size of your mortgage - so you can either cut your monthly mortgage payments or reduce the term of the loan, saving thousands of pounds in interest payments.
Research commissioned through MORI indicates that as many as one in four households looking for a new mortgage could be better off with an offset. But they are not suitable for everyone.
Money held in a savings or current account is offset against money that is owed on the mortgage - therefore reducing the overall debt and as a result, the interest paid on the loan. For example, if you had a mortgage of £100,000 and savings of £10,000 to offset, interest would only be charged on £90,000. If you opt to keep the monthly mortgage payment based on the full balance of the mortgage (£100,000), you will in effect be 'overpaying' every month and so whittling away your outstanding mortgage balance. This means that whilst you miss out on savings interest, you will pay off your mortgage earlier and save money.
Alternatively, if you need to reduce your monthly outgoings, you can opt to keep the loan spread over the 25 year term. This would still save you plenty in interest but you will benefit from cheaper monthly payments.
And there's more good news... the savings you make from your reduced mortgage interest payments are not subject to tax. Not only is this tax efficient but, as loan interest rates are generally higher than savings rates, by offsetting your mortgage, your effective rate of return on your savings is better too.
Of course, you might think it's just as easy to use surplus savings to pay off part of your mortgage. But an offset deal allows you to access these savings at any time.
Flexibility is one of their key characteristics. With many you can overpay, underpay or take a mortgage holiday - depending on life's financial fluctuations.
In most cases, offsetting is only worthwhile if you have a reasonable amount in savings. 'You need between £12,000 and £15,000 in savings to save 0.5 per cent or more off your mortgage rate,' says Louise Cummings, Head of Mortgages at Money Supermarket.
But even without a large savings pot, an offset mortgage can still be worth considering. Self-employed borrowers saving for tax bills can save alongside the mortgage; those with large bonuses could do the same, whilst still retaining access to their funds if they need to spend them.
If you think you might benefit from an offset, there are several online calculators that will take into account your salary, spending habits, saving and mortgages to work out whether you would save money.
1. A fixed-rate deal appeals to many because of the security of the regular payments but check what early redemption charges you might have to pay.
2. It helps to be internet savvy - it's much easier to shuffle money around an offset account online.
3. You also need to have fairly disciplined spending habits. If you blow a large chunk of the savings offsetting your mortgage, you'll end up with an uncompetitive mortgage deal.
Offset mortgages are a relatively new idea but as their popularity has grown, so has the choice and competitiveness of the deals available. With some, the borrowing rate is a little higher, but many are now as cheap as standard fixed rates and tracker mortgages. Compare deals across the market at Money Supermarket or Money Facts.
Or, if this is all making your head spin, get a financial intermediary to do the legwork. For details of local independent financial advisors, visit www.unbiased.co.uk.
Although structured differently, both achieve the same end. A current account mortgage lumps all your earnings, saving and borrowings in one account, so you get one statement showing the total amount owed.
Offset mortgages maintain the illusion of having your money in separate accounts (mortgage, savings, current and credit card) and you receive separate statements for each. Most people prefer this type.
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The views represented in this article are those of the author and not of Channel 4. The purpose of the article is to provide general information only and does not constitute financial, investment, legal or other advice.You should not rely on any information provided in this article and you should always seek out independent professional advice relevant to your own particular circumstances.
