The Offset Mortgage - Why Is It Growing In Popularity?

The biggest innovation in the mortgage market in recent years,

the offset mortgage, is now starting to take a significant share

of the market. Now, only six years after they were introduced,

the offset and the current account mortgage account for 10% of

all borrowed mortgage capital.



According to one of the UK's largest mortgage lenders, as many

as 25% of existing mortgage holders could save money in the long

run by choosing an offset mortgage.



If you're one of those

possible 25%, then it's important that you are aware of the

facts.



What exactly is an offset mortgage?



Here's the concept: you borrow capital from the mortgage lender

and you also have savings sat in another account. Instead of

paying interest on your full loan and earning interest on your

savings, you pay interest on the amount you borrowed minus the

amount you have saved. For example, if you had ฃ25,000 savings

and a mortgage of ฃ110,000, you would only pay interest on the

sum total of debt, which would be ฃ85,000.



Your savings would

not earn any interest on a separate level, they would only be

linked to the mortgage.



So what's the big selling point?



The major advantage to this kind of mortgage, particularly where

higher tax payers are concerned, is that you end up paying less

interest. This transpires because you are not earning interest

on the savings, and as you know, the taxman always takes a fair

amount of that interest away from you. If you have significant

savings, then you lose a lot to the taxman - but not with the

offset mortgage.



That's why this type of mortgage is so well

suited to people that have to pay over 40% tax.



These calculations illustrate the potential savings:



ฃ100,000 mortgage - 25 years



Interest rate - 4.69%



ฃ20,000 deposit



Traditional mortgage interest payments - ฃ85,351



Offset mortgage interest payments - ฃ41,998



Saving - ฃ43,353



With the offset mortgage you would also complete the mortgage

after just 19 years and 4 months.



This is because the monthly

repayments are calculated without your savings being included in

the equation - therefore you would overpay, and finish paying it

off early.



On average, a standard rate tax payer could feasibly save ฃ9,538

in tax and a higher rate taxpayer a considerable ฃ17,341.



There's also the benefit of flexibility - the offset is a lot

more forgiving than the traditional mortgage and you can

overpay, underpay and take payment holidays without penalties.



If it's that great, why isn't everyone doing it?



Offset mortgages used to have high interest rates, putting many

borrowers off at the first hurdle.



But as this type of mortgage

has started to take off, lenders are offering better and more

competitive interest rates.



The interest rate is however, still considerably higher than

with the fixed rate mortgage for example, and it's important

that anyone considering an offset mortgage can be sure that the

tax savings will cover the higher interest charge. It's the kind

of calculation that can only be accurately provided by a

professional mortgage adviser.



As a rule, the standard taxpayer must have savings of ฃ20,000 to

put against a ฃ100,000 mortgage to make the offset worthwhile. A

higher rate taxpayer would only need ฃ10,000 to justify this

type of mortgage. (These calculations were made in reference to

an average 4.69% fixed offset rate, and a 4.49% tracker

mortgage.) These figures will obviously change with the

potential rise and fall of interest rates, and as we project,

offset and traditional mortgage rates move closer together.



The many variations on the offset mortgage



Mortgage lenders, in their bid to win your business, offer

different incentives that they hope will give them the

competitive edge. The most common incentive is a free property

valuation or free legal work. The banks have a head start as

they can include your current account in the offset calculation

as well as your savings, but other lenders will let you offset

two different savings accounts. Others will offer a borrowing

facility and a chequebook.



The interest rate also varies considerably - from a 6-12 month

fixed rate, to a tracker guaranteed to stay below the base rate

for 6 months, or a tracker which tracks the base rate for a set

amount of years, but also charges a minimal premium.



The amount you are borrowing compared to the value of the

property will also affect the interest rate. At the moment one

lender will give an interest rate of 5.6% for people that are

borrowing less than 50% of the property value, whereas anything

above that (up to 99%) will have an interest rate of 6.



45%.



The concept may be easy for you to get your head around, but the

sums won't be. See an independent mortgage adviser for

individual advice tailored to your circumstances, it's the only

way to be sure that the offset is best for you. However, we

think that if you have savings and pay interest at a higher

rate, you'll be onto a winner with the offset.



*Indicative figures correct as at 11/05

How To Obtain The Best Offset Mortgage

This article will briefly discuss what an offset mortgage is; and how an independent mortgage advisor can help you buy the best offset mortgage.



An offset mortgage links your main current account and/or savings accounts to your mortgage. Every day or month, the amount owed on your mortgage is reduced by the amount in these accounts, before the interest is calculated on the loan. When the money in your savings/current account increases, you pay less on your mortgage.



If the money in your savings/current account decreases, you pay more on your mortgage.



When it comes to finding the best offset mortgage, it pays to have expert advice because there is more to a mortgage deal than meets the eye. Your mortgage will probably be the largest financial commitment in your life, and it pays to take time to look at the different options available to you.



There are different types of offset mortgages available on the market.



You could look at 'best buy mortgage tables' to find the best offset mortgage, but that only gives you superficial information. It doesn't show you the mortgage's flexibility; i.e. the ability to underpay, take payment holidays, or overpay, or what the fees and charges are. In the last couple of years, fees for mortgages have increased. Fees can be in excess of ฃ1000, and several mortgage providers are now charging fees as a percentage of the sum being borrowed, for example: a 2% fee on someone borrowing ฃ120,000 on a new low two-year fixed rate deal would pay ฃ2,400.



Once fees are taken into account, the best offset mortgage deal may not be the one with the lowest interest rate.



Recent research has shown that the best offset mortgage is not necessarily offered by the top 10 biggest mortgage lenders. The top 10 mortgage lenders offered only 11% of the best 250 mortgage deals available on the market, despite the top 10 having more than a 60% share of the mortgage market.



To guide you through this myriad amount of information available, an independent mortgage broker will give you impartial advice about the best offset mortgage, as they have comprehensive knowledge of the mortgage market. A mortgage broker is fully authorized by the Financial Services Authority (FSA) and they have the necessary qualifications to advise you.



Your mortgage broker will perform a 'factfind' to learn about your financial situation and circumstances, and your wants and needs.



Your broker will assess your ability to repay the mortgage, your credit history and credit scoring profile. Offset mortgages are usually calculated on an affordability basis and not on a simple income multiplier, which allows people with ad hoc financial income, such as a self-employed person, to possibly obtain a larger mortgage than with a standard, more traditional mortgage. All of the information you provide will help your broker obtain the best offset mortgage available for you on the market.



After the best offset mortgage has been sourced for you, your independent mortgage broker will provide you with written details about the mortgage, which will include:



- How much you want to borrow

- The type of offset mortgage you're interested in

- A description of the mortgage; who the lender is and the interest rate

- Overall cost of the mortgage including the fees

- How much your payment would be if the interest rates increased

- The flexibility of your offset mortgage



An independent mortgage adviser will answer any questions you have and ensure you have all the necessary information about the mortgage market.



It is worth spending time with them, as they are there to help you find the best offset mortgage.Resources