Offset Mortgage Providers are on the Increase

Offset mortgage providers are increasing in number, and it is predicted that offset mortgages will account for 30% of all UK secured lending by 2009.

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.