Savings rates may have shown signs of improvement recently, but it can't be denied that they're still pretty low, which means many people could be looking for ways to put their cash to better use. What about an offset mortgage? This could help you reduce the amount of interest you pay on your mortgage, so you could be far better off – and given that fixed offset mortgage rates have fallen to record lows, now could be a great time to consider it.
Moneyfacts' data shows that the average fixed offset mortgage rate currently stands at 2.07%, a whopping reduction from 2.41% at this time last year, and the lowest on record. It's even lower than the average fixed mortgage rate across the whole market, which currently stands at 2.30%, making this kind of deal an even more appealing choice.
Variable offset rates haven't fallen to the same extent, as the table below shows, but that just makes the security of a fixed rate even more worthwhile.
|Offset Average Fixed||2.65%||2.41%||2.24%||2.07%|
|Offset Average Variable||2.92%||2.68%||2.63%||2.63%|
|Offset product numbers||315||218||251||232|
However, it's worth pointing out that the offset mortgage sector is still incredibly small in comparison to the wider market, with only 232 such deals currently available, out of over 4,000 products in total. Availability has been dipping, too, which means it could be harder to track down the deal you want.
It's also for this reason that the average fixed offset mortgage rate is so low – in reality, offset mortgages typically come with higher rates than their standard counterparts, with the lower average appearing because of the smaller product count, and the fact that standard mortgages are available at higher LTVs and therefore higher rates.
So, at first glance an offset deal may appear better, but you'll need to look at individual products to decide if it's the right option for you. Nonetheless, it could still be worth considering, particularly if you've got a healthy savings pot that could be put to good use.
"Savers have been hit from all angles recently, and rising inflation is just a further blow," said Charlotte Nelson, finance expert at moneyfacts.co.uk. "With inflation eroding savers' funds it is little wonder they are looking elsewhere to put their cash to better use, and using an offset mortgage could be just that."
An offset mortgage allows you to link your savings pot to your mortgage balance, with the savings being used to reduce the interest charged on the mortgage. Your savings will be "offset" against your mortgage balance, which means you'll only pay interest on your mortgage minus your savings.
Your savings don't actually repay any of your mortgage – like they would if you used your savings to overpay – but sit alongside it and help save you interest. For this reason, offsetting could be a good choice if you think you may need to still dip into your savings, as unlike with overpayments, you can still access your cash.
EXAMPLE: You have a mortgage of £100,000, with an average interest rate of 2.30%, as well as £10,000 in your savings account. By offsetting that amount, you'll only pay interest on £90,000 of your mortgage.
Over a year, this could save you up to £230 in interest payments – you'd have to lock away your £10,000 for years to earn that amount in a savings account (assuming you went for Atom Bank's five-year fixed rate bond) – and you'll still be able to access the money should you need it, too.
Offset mortgages allow you to benefit in one of two ways: you can have lower monthly repayments (your mortgage term remains the same but you can pay back less each month), or you can get a shorter term (you keep your repayments the same and pay off your mortgage sooner). Either way, you can't go wrong!
Offset mortgages are only really suitable for those with a significant savings pot that they don't mind foregoing interest on, but if you meet those criteria, they could be hugely beneficial.
"With savings rates low it makes sense for those with a mortgage to utilise their cash savings within an offset facility to pay off substantial sums on their mortgage and become mortgage-free quicker than planned, and unlike with overpayments, borrowers can access the cash whenever it is needed," said Charlotte.
"Offset mortgage rates do tend to be slightly higher than standard mortgages on the market, but with rates reaching all-time lows, there has never been a better time for savvy borrowers to grab themselves an offset deal."
Speak to your mortgage provider to see if they offer an offset facility, or if it's time to remortgage, check out the best mortgage deals (making sure to look for those that come with an offset option)
Happy keeping your cash in a traditional savings account? Make sure you're getting the best savings rates possible
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