According to one lender’s research, offset mortgage holders in Britain are Â£1.4 billion better off than if they’d had their savings in an ordinary savings account.
First Direct, a division of HSBC, conducted research on its own customers over a two year period and concluded that offset mortgage borrowers had achieved a Â£1.9 billion return compared to the Â£535 they would have made using the available ‘best buy’ savings accounts.
With an offset mortgage the borrower has both the mortgage and any savings they have with the same bank or building society. Then the figure they owe on the mortgage is reduced by the amount of savings they have and interest is then only applied to the remainder. But no interest is paid on the savings pot.
So, if you have a mortgage of Â£100,000 and savings of Â£40,000 then you only pay mortgage interest on Â£60,000. And with no interest accrued on your savings there is no tax to pay.
As borrowing rates are generally well below lending rates the holder of the offset mortgage benefits. In general, the more you have in savings compared to your mortgage the better the return.
But there are points to bear in mind.
Firstly, all your eggs are in one basket. You have to have the accounts with the same company, so check out the terms and conditions carefully.
Secondly there is also the issue of any Financial Services Compensation Scheme limits, especially if your savings and mortgage are very substantial. Check out the latest from the FSCS website.
Thirdly you will also need to ensure that the amount of savings you have will benefit you in the way intended. With insufficient savings in the pot you may actually be paying more than you should than if you were to just get the lowest mortgage rate available. It might be better to use your savings to pay off more of the mortgage and get a standard one.
Then there is the nature of the savings. If they are earmarked for some other future purpose, make sure that any offset mortgage tie-in period expires first. Also, if the savings are also your emergency funds then consider carefully what would happen to your mortgage payments should you be forced to draw down on those savings.
Offset mortgages are normally of the interest only type, so no account is made for paying down the capital amount owed.
As with taking out any mortgage, the best thing to do is get the advice of an independent mortgage adviser and ask them these questions.