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Offset Mortgages – What Can You Really Save?

The current account and offset mortgage market has showed strong growth since its launch in the UK in 1994. In 2004 it was worth £29.2 billion and made up 10% of the total UK secured lending market and this is predicted to rise to £84.7 billion by 2009, making up 30% of the total secured lending market¹.

Rachel Mckay, mortgage analyst from moneyfacts.co.uk comments on offset and current account mortgages and the options available to consumers:

“Although your current financial circumstances may prevent you from taking advantage of offset or current account mortgages, don’t dismiss them completely, as with professional financial planning they may still prove to be a beneficial option to consider in the future.

“Offset mortgages provide consumers with the ability to manage their own repayment structure, permitting overpayments, underpayments and payment holidays, and with the possibility of a hassle free additional drawdown facility. If managed correctly consumers can soon see their mortgage term decrease.

“The ability to pool accounts, thereby reducing the interest accrued can be very beneficial particularly for the self-employed who save regularly for their tax bill. The interest on these savings would otherwise be taxed as additional income, but by offsetting these funds they work in the opposite manner, reducing the mortgage interest and thus not accruing any credit interest on which tax must be paid.

“However as the rates offered tend to be higher than those found on ‘traditional’ mortgage products, they can be an expensive choice if the consumer does not make full use of the offset features, and are best used as part of a long term financial plan.

“Consumers should keep an eye on the best buy tables or mortgage comparison websites, and ensure they regularly seek independent financial advice to ensure the right mortgage vehicle is used to suit their individual circumstances.”

The scenarios below highlight the potential savings benefits available to consumers both reducing the amount of interest payable and reducing their mortgage term.

SCENARIO A - OFFSET:
£100k mortgage over 25 years at 5.24% - monthly repayment £599.85

SCENARIO B - OVERPAYMENT:
£100k mortgage over 25 years at 5.24% - monthly repayment £599.85