Consider an offset mortgage
Low interest rates mean that now could be the perfect time to consider an offset deal. Nathalie Bonney explains why.
The bank of England base rate has been stuck at 0.5% for what feels like forever and at the same time inflation is reaching higher levels making it harder – or less worthwhile to safe.
One way round this, if you're a homeowner, is with an offset mortgage.
Offsetting your savings against your mortgage basically means that you reduce the total mortgage balance and therefore only pay back interest on this reduced amount. So in the long run you save money by paying less interest back on your mortgage – and you can also reduce the time it takes to pay back the mortgage.
Say you have £40,000 saved and a £200,000 mortgage – you would only have to pay interest on £160,000.
And it's not just for people with loads of savings. Research suggests that someone with just 5% of their mortgage balance could still take advantage of an offset.
The flexibility of offsets makes them ideal if you need easy access to your savings. When you've got money coming in this goes towards offsetting your mortgage but when you haven't you can still access your savings.
High rate taxpayers also benefit: because you don't receive interest on your savings you don't have to pay tax either.
On the downside, interest rates tend to be slightly higher than standard mortgage deals.
You can only link current or savings accounts with the same provider you have your mortgage with – and how many will depend on each lender.
It also requires a fair bit of organisation: if linked to a current account make sure your mortgage payments only go out after you've been paid so that you're making the most of your high balance. Likewise set up direct debit bill payments to come out after your mortgage.
Like standard mortgages the terms of an offset will vary from one lender to another: some are interest only others are flexible allowing you to make extra payments.
All of this requires a bit of thought and planning – but if you've got some spare savings an offset is worth considering.