As savings rates continue to fall, savers with a mortgage may find solace in the offset mortgage, which combines their mortgage with their savings and is currently experiencing record low rates.
By switching to an offset mortgage, borrowers will not only be able to reduce the size of their mortgage, but save thousands of pounds in mortgage interest. This could be particularly beneficial at present, as research from Moneyfacts shows that the average offset fixed rate has fallen by 0.30% over the last year alone. The average offset variable rate, in contrast, has seen an increase from last October, as is illustrated in the table below, though it is still down by more than 0.70% from the average rate five years ago.
Commenting on the findings, Charlotte Nelson, finance expert at Moneyfacts, said: "With interest on savings accounts dwindling, it is a difficult time for many savers. However, those who have a mortgage could look elsewhere to see if their nest eggs can work even harder for them; an offset product could provide a genuine alternative. For example, based on the average two-year fixed rate for an offset (2.02%) and non-offset product (2.38%), a borrower would save £742 [based on £150,000 mortgage amount over 25 years and £10,000 savings pot] in just one year and shave a year off the term of their mortgage.
"An offset mortgage is the ultimate flexible product, as it allows borrowers to reduce the interest paid on their mortgage while simultaneously having instant access to their savings pot. Despite the Personal Savings Allowance firmly in place, the tax benefits of an offset mortgage are still a consideration for many. The reductions in the average offset fixed rate and price are only going to boost its appeal.
"However, when mortgage rates have reached their low point, borrowers should keep in mind that there could be better deals out there. For instance, the lowest five-year fixed deal at 75% loan-to-value is priced at 2.05%, 0.23% less than the lowest five-year fixed rate offset deal. Borrowers looking to get the most out of their savings will therefore need to decide carefully whether the extra flexibility is worth paying for."
It may seem quite difficult to compare offset mortgages with regular fixed alternatives, while taking into account the savings rates that may be lost or gained by choosing one method over the other. Aside from doing plenty of research and looking at the mortgage and savings best buys for comparison, we would therefore highly recommend speaking to an expert, so that you can be made aware of all your options and the costs involved with each before deciding if an offset mortgage is for you.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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