The well-documented cutting of interest rates has had a far bigger impact on savers than borrowers.
Research shows the average savings rate on instant access accounts is now just 0.66%, while those willing to lock their money away in fixed rate bonds can earn 2.65% on average.
Compare this to the mortgage market, where the average rate of a two-year
fixed-rate deal for borrowers with a 25% deposit is still over 4%, and it's a similar story for those on
tracker deals.
The gap between savings and mortgages actually widens further once you factor in the tax that many savers pay on interest earned.
Consider an offset
There are three main reasons why you should consider
switching to an offset mortgage.
The main one is that, by combining your savings and mortgage, you essentially earn interest on your savings at the mortgage rate.
Consider the following example: You have a £100,000 mortgage on which you pay 4%, and savings of £20,000 on which you earn an above average rate of 2.8% net of tax (3.5% gross).
This means you will earn £560 a year in net interest and pay £4,000 on mortgage interest, leaving you with an overall net cost of £3,440.
Offset advantage 1: Save money:
Now let's assume you combine your home loan and savings in an offset mortgage.
This means you get no interest on your £20,000, but only pay mortgage interest on £80,000, which works out to £3,200.
That means you are £240 a year better off by
switching to an offset mortgage. And of course, the more savings you have, the better off you will be.
Offset advantage 2: Pay what you like
With an
offset, you have a maximum loan. 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.
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.
