Print Article for : Fixed Rate Offset Mortgage

Your Online Guide » Guide to Finance » How To Handle Finances

[F383]Fixed Rate Offset Mortgage

by Bobbie Carle, Bob

What are offset mortgages?

Offset mortgages allow homeowners to link the balance on a savings and current account with their mortgage, while still allowing instant access to their money. The amount in the savings and current account is calculated on a monthly or daily basis and used to reduce or ‘offset' the interest payments due on the mortgage. For example: your mortgage might be £200,000, but you have £20,000 in your savings account and £3,000 in your current account. This means you will only pay interest on £177,000.

Choosing the best offset mortgage

There are over 30 offset mortgage providers in the UK market and about 250 offset products in the market – but with so many to choose from, how do you choose the best offset mortgage deal for you?

You could traipse up and down the high street visiting all the banks and building societies, and obtain the latest information on their offset mortgages. Or you could save your shoe leather and consult an independent mortgage broker. They will calculate whether an offset mortgage is suitable for you. They have the latest deals from offset mortgage providers at their fingertips, and they will help clarify which is the best offset mortgage deal for you, as each lender is different. For example: two offset mortgage providers offer different deals on a mortgage of £150,000. One offers a two- year fixed rate at 5.29% and the other one offers a two-year fixed rate at 6.33%. On face value the offset mortgage provider offering 5.29% looks the better deal, however the fee for the mortgage is 2.5% of the loan value which totals £4,249. The fee on the 6.33% deal is £99. A borrower opting for the 5.29% offset mortgage deal would pay £1,430 more than the 6.33% borrower.

Who could benefit from an offset mortgage?

Self-employed people: the self-employed are often paid without any tax deduction. They save their money over the year in preparation of their tax bill and an offset mortgage offers them a handy way to obtain maximum benefit from their money, but still have it available when the tax bill is due. A Regulated Mortgage Survey (RMS) revealed 21% of offset borrowers in 2006 were self-employed, compared to 16% of non-offset borrowers. For the self-employed some offset mortgage providers combine their self cert products with offset features.

Savers: A general guide is about 10% of the value of the mortgage in savings. However in some cases, savers only need about 5% of the mortgage debt in savings to make the offset deal worthwhile.

Higher-rate taxpayers: Higher-rate tax payers lose 40% of any interest earnt on savings accounts to the taxman. With an offset mortgage no interest is paid on accounts linked to an offset, so there isn't any tax to pay. Some offset mortgage providers allow ISAs to be linked to an offset mortgage. Although savers do not receive any interest, they avoid forfeiting their right to save up to £3,000 in an ISA per year. Once the mortgage has been paid for, then they start receiving interest on the ISA. Some borrowers have managed a 0% mortgage because they have enough in their ISAs, savings and current account, to offset their whole mortgage.

Conclusion

Offset mortgages are increasing in popularity as more borrowers recognize the benefits an offset mortgage offers them. More offset mortgage providers are entering the market, which is good for the borrower as it offers more choice, however, without the advice from an independent mortgage broker, it can be difficult to choose the best offset mortgage deal.

An offset mortgage means borrowers only pay interest on their net loan amount ? minus any savings they have in the same or linked account. Monthly mortgage repayments are calculated on the full debt, before offsetting is taken into account, so borrowers overpay their debt each month. Consequently, their mortgage debt is reduced much faster than with a conventional mortgage. Two examples are:

- A borrower with a ?100,000 mortgage paying offset tracker loan rate of 5.24% would save more than ?39,000 interest over the life of the mortgage by offsetting ?20,000 of savings. The borrower would also pay off the mortgage five years early, based on a 25-year mortgage.

- A borrower with a ?150,000 mortgage would save more than ?60,000 interest over the life of the mortgage by offsetting ?25,000 of savings. If the borrower continues to make mortgage repayments based on the full loan, he would pay off the mortgage five years and three months early, based on a 25-year mortgage.

Savings and income can be drawn on as needed, or built up to cut future repayments, and borrowers do not pay tax on the interest earnt from their savings when it is offset against a mortgage.

According to one mortgage lender, one in four households would benefit from an offset mortgage. The Council of Mortgage Lenders said the number of offset borrowers jumped 50% last year to 170,000, which was worth ?29.3bn, and represented 7% of new lending. However, many households looking for a new mortgage do not realise they would be better off with an offset mortgage.

An offset mortgage tends to be the best option for borrowers with savings worth at least 8% - 10% of their mortgage if they are a higher rate taxpayer, for example, a higher rate taxpayer would need at least ?10,000 in savings to offset against a ?100,000 mortgage. A basic rate taxpayer would need at least ?20,000 in savings to offset against a ?100,000 mortgage. To match the savings made by offsetting, a higher-rate taxpayer would approximately need to earn 12% in a deposit account or 9% for a basic-rate taxpayer. An offset mortgage can also be suitable for people who are paid large bonuses or large amounts of commission on an irregular basis.

The Council of Mortgage Lenders said there are 250 offset products available. Three examples are:

- A cash Isa that can be set against the mortgage for tax-free savings

- Up to six current accounts can be used to offset against the mortgage - this allows family members to add their finances to the accounts, so it can be offset against the mortgage.

- Family offsets, which enable parents to help their children get on the property ladder. Parents can use their savings to be offset against the mortgage, which will bring down their children's monthly repayments, and they still have access to their savings if they need it.

Offset loans are flexible. Without penalty, borrowers can pay off capital, make underpayments, and take payment holidays. Because an offset mortgage is flexible, the loans have a higher rate than traditional deals. However, the rates on an offset mortgage have fallen in recent years due to increased competition and many borrowers believe it is worth paying a premium rate because of the benefits gained with an offset mortgage.

An offset mortgage has grown in popularity for borrowers because offsetting is a great way to reduce the term of the mortgage, thus saving thousands of pounds on mortgage repayments, and still allowing access to savings for emergencies.

Article Source : Pg. 225

About Author

Both Bobbie Carle & Simon Mellor are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Bobbie Carle has sinced written about articles on various topics from Finances. Bobbie Carle wrote the article ‘Offset Mortgage Providers are on the Increase' and recommends you visit http://www.offsetmortgagecentre.co.uk/offset-mortgage-providers.html to. Bobbie Carle's top article generates over 720 views. to your Favourites.

Simon Mellor has sinced written about articles on various topics from Finances. Simon Mellor wrote the article ?An Allows Your Savings To Work For You? and recommends you visit. Simon Mellor's top article generates over 720 views. to your Favourites.