With low interest rates coupled with high inflation, savers have few savings accounts to turn to make a real time, is it time to consider an offset mortgage rather than pure savings account?
We still have a low Bank of England base rate at 0.5% and this coupled with a rising level of inflation (the Retail Price Index hit 3.7% in January), means there is little opportunity for consumers to gain any real return on their savings.
If you have a mortgage it may therefore be a good time to consider a switch to an offset mortgage, rather than put your money into poor paying savings accounts.
An offset mortgage works by offsetting consumers’ savings against the debt of their mortgage. The savings balance is offset against the outstanding mortgage balance, with interest only accruing on the remaining balance. The result being the mortgage will be paid off sooner and the interest accrued will be significantly less.
As Hannah Mercedes-Skenfield, mortgage channel manager at moneysupermarket.com, commented “the advantages of an offset mortgage are becoming more attractive to borrowers who also have a decent savings pot. At times like these, when interest earned on savings after tax is potentially lower than the interest consumers pay on their debt, offsetting can be a great option. There is an additional benefit for taxpayers, as you don’t earn interest on the savings, you won’t be taxed on them either. This is even more of a benefit to higher rate taxpayers.
It’s worth noting however that offset deals won’t necessarily be the right option for all prospective borrowers.
The savings that consumers could realise will depend on the proportion of the mortgage debt they hold in savings and the rate they pay on their mortgage. Don’t forget to factor in any additional costs of remortgaging as these could be high depending on the offset mortgage you choose.”
To help understand the savings and potential benefits, according to moneysupermarket, customers taking out a £100,000 offset loan from Woolwich at 3.49 per cent and holding £30,000 in a linked savings account, would only pay interest on the remaining £70,000, saving £11,648.51 in interest over the lifespan of the mortgage and knocking five years off the payment term.
To be able to match this deal, savers would need to find a savings rate of at least 4.5 per cent for basic rate taxpayers, rising to 6 per cent for higher rates taxpayers. None of the 264 easy access savings accounts currently pays a high enough rate.
Another option at this time of low mortgage rates is to consider making overpayments, using the extra cash where possible to overpay mortgage payments to make savings.
Lloyds Banking Group recently announced a new scheme for example that allows customers with a variable rate mortgage to make increased mortgage overpayments without financial penalty.