The Offset Mortgage Why Is It Growing In Popularity

The Offset Mortgage Why Is It Growing In Popularity

The Offset Mortgage – Why is​ It Growing in​ Popularity?
The biggest innovation in​ the​ mortgage market in​ recent years,​ the​ offset mortgage,​ is​ now starting to​ take a​ significant share of​ the​ market .​
Now,​ only six years after they were introduced,​ the​ offset and the​ current account mortgage account for 10% of​ all borrowed mortgage capital .​
According to​ one of​ the​ UK's largest mortgage lenders,​ as​ many as​ 25% of​ existing mortgage holders could save money in​ the​ long run by choosing an​ offset mortgage .​
If you're one of​ those possible 25%,​ then it's important that you​ are aware of​ the​ facts .​
What exactly is​ an​ offset mortgage?
Here's the​ concept: you​ borrow capital from the​ mortgage lender and you​ also have savings sat in​ another account .​
Instead of​ paying interest on​ your full loan and earning interest on​ your savings,​ you​ pay interest on​ the​ amount you​ borrowed minus the​ amount you​ have saved .​
For example,​ if​ you​ had £25,​000 savings and a​ mortgage of​ £110,​000,​ you​ would only pay interest on​ the​ sum total of​ debt,​ which would be £85,​000 .​
Your savings would not earn any interest on​ a​ separate level,​ they would only be linked to​ the​ mortgage .​
So what's the​ big selling point?
The major advantage to​ this kind of​ mortgage,​ particularly where higher tax payers are concerned,​ is​ that you​ end up paying less interest .​
This transpires because you​ are not earning interest on​ the​ savings,​ and as​ you​ know,​ the​ taxman always takes a​ fair amount of​ that interest away from you​ .​
If you​ have significant savings,​ then you​ lose a​ lot to​ the​ taxman – but not with the​ offset mortgage .​
That's why this type of​ mortgage is​ so well suited to​ people that have to​ pay over 40% tax .​
These calculations illustrate the​ potential savings:
£100,​000 mortgage - 25 years
Interest rate - 4.69%
£20,​000 deposit
Traditional mortgage interest payments - £85,​351
Offset mortgage interest payments - £41,​998
Saving - £43,​353
With the​ offset mortgage you​ would also complete the​ mortgage after just 19 years and 4 months .​
This is​ because the​ monthly repayments are calculated without your savings being included in​ the​ equation – therefore you​ would overpay,​ and finish paying it​ off early .​
On average,​ a​ standard rate tax payer could feasibly save £9,​538 in​ tax and a​ higher rate taxpayer a​ considerable £17,​341 .​
There's also the​ benefit of​ flexibility – the​ offset is​ a​ lot more forgiving than the​ traditional mortgage and you​ can overpay,​ underpay and take payment holidays without penalties .​
If it's that great,​ why isn't everyone doing it?
Offset mortgages used to​ have high interest rates,​ putting many borrowers off at​ the​ first hurdle .​
But as​ this type of​ mortgage has started to​ take off,​ lenders are offering better and more competitive interest rates .​
The interest rate is​ however,​ still considerably higher than with the​ fixed rate mortgage for example,​ and it's important that anyone considering an​ offset mortgage can be sure that the​ tax savings will cover the​ higher interest charge .​
It's the​ kind of​ calculation that can only be accurately provided by a​ professional mortgage adviser .​
As a​ rule,​ the​ standard taxpayer must have savings of​ £20,​000 to​ put against a​ £100,​000 mortgage to​ make the​ offset worthwhile .​
a​ higher rate taxpayer would only need £10,​000 to​ justify this type of​ mortgage .​
(These calculations were made in​ reference to​ an​ average 4.69% fixed offset rate,​ and a​ 4.49% tracker mortgage.) These figures will obviously change with the​ potential rise and fall of​ interest rates,​ and as​ we project,​ offset and traditional mortgage rates move closer together .​
The many variations on​ the​ offset mortgage
Mortgage lenders,​ in​ their bid to​ win your business,​ offer different incentives that they hope will give them the​ competitive edge .​
The most common incentive is​ a​ free property valuation or​ free legal work .​
The banks have a​ head start as​ they can include your current account in​ the​ offset calculation as​ well as​ your savings,​ but other lenders will let you​ offset two different savings accounts .​
Others will offer a​ borrowing facility and a​ chequebook .​
The interest rate also varies considerably – from a​ 6-12 month fixed rate,​ to​ a​ tracker guaranteed to​ stay below the​ base rate for 6 months,​ or​ a​ tracker which tracks the​ base rate for a​ set amount of​ years,​ but also charges a​ minimal premium .​
The amount you​ are borrowing compared to​ the​ value of​ the​ property will also affect the​ interest rate .​
At the​ moment one lender will give an​ interest rate of​ 5.6% for people that are borrowing less than 50% of​ the​ property value,​ whereas anything above that (up to​ 99%) will have an​ interest rate of​ 6.45% .​
The concept may be easy for you​ to​ get your head around,​ but the​ sums won't be .​
See an​ independent mortgage adviser for individual advice tailored to​ your circumstances,​ it's the​ only way to​ be sure that the​ offset is​ best for you​ .​
However,​ we think that if​ you​ have savings and pay interest at​ a​ higher rate,​ you'll be onto a​ winner with the​ offset .​
*Indicative figures correct as​ at​ 11/05

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