For most people their mortgage is their biggest outgoing each month, so it is no surprise that many borrowers want to pay off their loan early. Flexible and offset mortgages help borrowers to do this by allowing overpayments and offsetting savings balances.
Offset options
Offset mortgages are loans where borrowers can offset savings balances, and sometimes current accounts, against the mortgage balance and only pay interest on the outstanding amount.
If, for example, you had a £100,000 mortgage and £20,000 in savings, you would only pay interest on £80,000. If you kept your repayments at their usual level, this would mean you would pay off the mortgage quicker.
The downside of these products is that they come with higher interest rates than standard deals so you would have to make good use of the offset facility to make paying the higher rate worthwhile.
Katie Tucker of mortgage broker John Charcol recommends Intelligent Finance’s offset products and highlights the lender’s two-year tracker rate at 0.09 below the base rate, giving a pay rate of 5.66 per cent. It is available up to 90 per cent loan-to-value and has an arrangement fee of £1,999.
It will allow offsetting of savings and current accounts, she says, Intelligent finance is excellent in this field as it offers the option of a gross or net offset option so you can control how your savings work for you.
Having your savings in an offset mortgage also means you do not pay tax on the savings you are offsetting – a particular benefit for higher-rate taxpayers.
Degrees of flexibility
Many mainstream mortgages offer ‘flexible’ features such as overpayment and ‘borrow-back’ facilities – in effect allowing you to offset your savings until you need them. Most mortgages allow a 10 per cent overpayment facility per year.
For example, Nationwide’s normal range of mortgages are flexible and allow you to overpay by up to £500 per month with the option to take payment holidays or borrow back the money later on.
Figures from John Charcol’s online calculator show that if you had a £200,000 mortgage at a rate of 5 per cent and offset savings of £20,000, you would save £39,589.96 in overall interest payments and knock just over four years off the term (paying it off in just under 21 years, rather than 25).
Another way to save money on your mortgage is to make regular overpayments. When you take out a mortgage, your lender will set your payment so that the loan and interest are paid off within the term – normally 25 years. If you make bigger payments each month you will pay off the mortgage quicker and pay less interest overall.
For instance, if you had a £150,000 mortgage at 5 per cent for 25 years and overpaid by £100 a month you would pay off the loan four and a half years early and save £23,176 in interest payments.
Finding the cash
Finding the money for overpayments might be easier than you think. According to Britannia Building Society, simply by cutting out a packet of cigarettes a day and buying one less pint of beer or glass of wine a week, borrowers would save an average of £160 a month – which could be added on to their mortgage payment. By doing this a 25-year £130,000 mortgage would be paid off seven years early, saving the borrower about £38,000 in interest.
And by resisting just one cup of take-away coffee and a bar of chocolate a day – which comes to about £60 per month – and using the cash to make overpayments, a mortgage could be reduced by £18,000.
Britannia’s managing director Tim Franklin says: “Flexible mortgages are often overlooked in favour of fixed-rate deals – but this can be short-sighted.
“Britannia’s flexible mortgage tracks the bank base rate, plus 0.5 per cent. The benefits of this mortgage include the option to make lump-sum or regular overpayments to reduce the mortgage term and interest payable. In addition, interest is calculated daily, which means you benefit immediately from any overpayment, and with no early repayment charges there’s nothing stopping you from taking control today, and being mortgage-free sooner than you think.”
Franklin’s views are backed up by a recent survey by Which? It found that being mortgage-free sooner than the standard 25 years is an achievable aim.
Two-thirds of survey respondents were taking steps to pay off their mortgage early, and an ambitious 3 per cent wanted to be free of mortgage debt by the time they were 40.
Thirty-six per cent of respondents to the Which? survey were aiming to pay off their mortgage early by making monthly overpayments, and approximately the same number were making regular lump-sum overpayments on their mortgage.
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