Buy-to-let
Woolwich, the company that pioneered offset mortgages in 2000, has just launched its lowest rate ever by cutting the interest on its lifetime tracker offset mortgage to less than 5 per cent. It is indicative of a changing market: where offset mortgages used to be the preserve of the rich, the cost compared to normal home loans has reduced dramatically in the last few years. Being able to offset savings against a mortgage loan is now an attractive option to many homebuyers.
Andy Gray, head of mortgages for the Woolwich, comments: The take-up of offset and tracker mortgages has doubled in the last three months [between April and July]. With interest rates still low, savers are fairly restricted, with few long-term rates above 5 per cent. We think the market is ripe for the offset mortgage to come back into its own, with the product likely to appeal to a wider audience than ever before.
The benefits of offsetting
Lenders are also working harder to make the benefits of an offset mortgage clearer to customers. For example, Standard Life now has a series of films on its website, intended to make it easier for customers to understand how it can work for them. The idea of an offset is quite simply that they offset their savings against their mortgage, says head of marketing Andrew Boddie. This reduces the balance of their mortgage, reducing their interest payments at the same time. Many people have struggled to understand this to date, but there is certainly a growing comprehension.
The fact that many offset mortgages now allow customers to be much more flexible with their mortgage payments has also boosted the product’s popularity. For example, Standard Life allows customers to add the offset feature to all its discounted products, while Abbey offers a range of options.
Abbey customers can choose to fix the rate of its Flexible Plus offset mortgages, all of which are lifetime trackers, for the first six months at 4.79 per cent. After this customers revert to base rate plus 0.75 per cent. The company estimates that borrowers with an offset mortgage of £180,000 who overpay by just £3 per day could save themselves £22,000 in interest and pay off their mortgage three and a half years early. Jeff Scott, Abbey’s head of mortgage marketing, says: Our offset customers benefit in many ways. Not only do they pay a competitive rate of interest for the life of the mortgage without having to switch to a new deal, but any overpayments reduce the interest charged as well as cutting the mortgage term.
Making a difference
Drew Wotherspoon, head of communications at independent mortgage experts, John Charcol, agrees that even minimal overpayments make a considerable difference. Take a borrower with a £150,000 mortgage who has arranged the loan over 25 years on a repayment basis. Their normal monthly payment would currently be £876, based on a rate of 5 per cent (6.3 per cent APR) paying over £113,000 in interest over the term. Overpaying by just £24 a month, taking the monthly payment to £900, would save £6,600 in interest and knock one year and four months from the term of the loan.
The increased number of people taking career breaks in their 20s and 30s are also keen to have greater versatility. They need mortgage products that afford them a degree of flexibility in terms of over- and underpayments as well as repayment holidays, comments Debbie Milsom of the One Account. From our experience with the One Account’s current account mortgage, the overriding goal is to pay a mortgage off early. Once they see the reduced interest and loan size achieved by offsetting their savings and paying their income into the mortgage, it becomes a real focus.
The Yorkshire Building Society has taken flexibility one step further. Customers can now link up to three savings accounts to their offset mortgage, including those of willing parents or friends. We all like to have our pots of money for holidays or bills or a new car, said Tanya Jackson, media relations manager. Offset Plus means parents, for example, can choose to offset some of their savings against their child’s mortgage. They retain full control over access to their savings but it reduces their children’s mortgage payments.
Offset mortgages may have increased in flexibility and popularity, but do your research: they don’t suit everyone. You still do need a modicum of savings to make offsets the right choice. Evaluating their suitability for you is all about what features you will use, advises Wotherspoon.
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