The recent cut in the Bank of England base rate may have come as welcome news for many mortgage holders, but for savers it has been yet another hit on their returns.
There is light at the end of the tunnel however. At times when homeowners are struggling to make their savings work for them, offset mortgages offer an excellent alternative, and can also be big money-savers.
This type of mortgage works by allowing homeowners to ‘offset’ the balances held in their savings and current accounts against the mortgage debt, thereby reducing the amount of interest payable on the mortgage. Put simply, instead of earning interest on their savings, a borrower pays less interest on the mortgage.
There are a number of other attractive benefits to offsetting. Because no interest is earned on the savings, there is also no tax to pay, so this can be particularly useful for higher rate taxpayers.
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There is also a greater degree of flexibility than can be found with many traditional mortgages. Most deals provide an overpayment facility, but this is often restricted to 10% of the mortgage balance per year. Offset mortgages generally provide an unlimited overpayment facility and, perhaps more importantly, borrowers retain easy access to their savings at all times.
This type of mortgage can be especially effective for homeowners with variable sources of income. The self-employed, for example, might use their offset account to put money aside over the course of the year to pay their tax bill, so having that easy access is essential.
Lenders generally offer two options depending on how the borrower wants their mortgage to work. They can choose to reduce their monthly payments as a result of the reduced interest charge, if cutting costs is a priority.
Many opt to keep their payments as they are however, in order to reduce the overall term of the mortgage. This means making savings on the overall amount of interest paid and clearing the debt much quicker.
The interest rates available for offset mortgages are higher than for traditional mortgages, so borrowers will need to do their sums before deciding if this is a worthwhile option for them. However, with interest rates currently at record-lows, and savings accounts offering little in the way of returns, now may be the time for borrowers to consider using their money in a different way, and ultimately for their own benefit.
If you are considering an offset mortgage or simply need mortgage advice, then please speak to the Guild Mortgage Service provided by fee free L&C Mortgages.
You can contact L&C mortgages on: 0800 073 1945