People with a mortgage and savings, could find that now is the perfect time to switch to an offset mortgage, which could provide a cushion against low savings rates.
Offset mortgages work by setting the borrower’s savings against the total debt of their mortgage. Unlike a savings account, interest is not earned on the balance of the savings pot; instead the money is set against the outstanding mortgage, with interest only charged on the remaining balance. This means the mortgage will be paid off earlier, because the monthly repayments are based on the full mortgage amount, and the total interest paid will be far less. However, offsets are totally flexible so the borrower can still access their savings at any time – the mortgage balance on which interest is earned will simply adjust.
For example, someone taking out a £150,000 repayment mortgage over 25 years with First Direct’s two-year tracker mortgage at 2.08 per cent and holding £50,000 in a linked savings account, would only pay interest on the remaining £100,000. This would mean a saving of £6,799 in interest payments over the lifetime of the mortgage and would also knock three years five months off the time it takes to clear their debt as the monthly payments would be based on the full £150,000 loan.
Clare Francis, site editor at MoneySupermarket.com, said: “With inflation so high and interest rates so low, it has become pretty much impossible to find a savings account which offers a positive rate of return. But if you’re looking for a new mortgage at the moment and have money in savings it’s worth considering an offset.
“In the past the rates on offsets tended to be higher than those on standard mortgage products which meant you needed a significant amount in savings to make offsetting worthwhile. However, there is now very little difference so they’re suitable for more people.
“Offsetting is particularly attractive for higher and top rate taxpayers because you pay less tax due to the fact that you don’t earn any interest on your savings. Instead your savings work to reduce your mortgage more quickly.
“If you are unsure what type of mortgage to go for it’s worth speaking to an independent mortgage broker who’ll be able to advise you on the most suitable product for your circumstances.”
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