Apr on deposits are pitifully low right now. There is however one way you can still put your money to work: get an offset mortgage. This product links a personal savings account to your mortgage loan and offsets both. The objective is so that you can lessen the amount of the mortgage on which you have to pay interest. For instance, if you have got a £100,000 mortgage loan as well as £20,000 in savings held separately you pay interest on £100,000 at your mortgage rate and receive taxed interest on £20,000. On the other hand, with an offset mortgage loan you give up the interest income so that you will just pay interest on the net £80,000 loan.
The concept is getting more popualr. Offset mortgages made-up 11% of all new mortgage loans sold in the second quarter of this year, in accordance with the Council of Mortgage Lenders. That is up from 8.5% in 2008. The key reason will be the low interest rates on saving. Most individuals’ savings revenue is not going to even keep pace with inflation, after tax. Therefore they are generally far better off using the balance to reduce the higher interest (in most cases) being paid out on a home mortgage.
Sales of offset mortgages are also growing because they’re increasingly competitive. A few years ago the best first time buyer mortgages were still 0.75%-1% more than the leading conventional home loan products, says Damian Clarkson on MSN Money. Given that gap has shrunk – typical offset home loan rates are merely 0.1% higher.
But before you rush to set one up, be aware of the compensation rules in the event that your lender goes bust. Within the present terms of the Financial Services Compensation Scheme (FSCS), consumers with an offset mortgage loan would see their entire savings used to cancel out part of their debt. So if you have a £200,000 mortgage loan and also £100,000 in your offset savings account, that £100,000 will be used to reduce your loan (and not being reimbursed), leaving you with a £100,000 mortgage.
There is however some good news: only savings above the new £85,000 Europe-wide compensation limit is going to be netted off that way. If you take the same example, £85,000 of the savings will be risk-free, but £15,000 will be taken off your mortgage. If your loan provider went bust, you’d be still left with £85,000 in savings along with a £185,000 mortgage loan. Each individual gets £85,000 of savings protected. Thus for those who have a joint offset mortgage, only savings over £170,000 will be netted of. FirstDirect offers a two-year offset deal at 1.89% above the Bank of England rate which has a £99 fee. You’ll need a 35% down payment first.