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If you want to bring your monthly mortgage bills under control, clear your loan years ahead of schedule, or supercharge the return on your savings, you can do all three with an offset mortgage ? which could be why many lenders keep such deals firmly under wraps.
Offsets have been dubbed ?Cinderella mortgages? ? hardworking and effective, but overshadowed by glitzier rival deals. They come into their own when savings rates are low. And there?s never been a better time to consider one.
How do they work?
Offsets deduct the value of any linked savings accounts from your mortgage before working out how much monthly interest you need to pay.
Committed: Elliot Jones and Andrea Widdows have an offset mortgage
If you have a ?150,000 loan and ?30,000 in linked savings, say, then you will have to pay interest only on the difference ? a much lower ?120,000.
If you need to cut your monthly outgoings, then you can ask to pay this lower amount. But if you want to live mortgage-free years ahead of schedule ? and save thousands of pounds in the process ? then keep paying interest on the full ?150,000.
The maths is complicated, but overpaying like this on a mortgage costing 3.5 per cent will bring your balance down to zero three years and eight months before the standard 25-year? term. And clearing the mortgage that much earlier will knock? about ?30,000 off your total interest bill.
What are the downsides?
Critics point to the fact that interest rates on offset mortgages are typically higher than those on best-buy conventional mortgages.
But with savings rates so much lower than mortgage rates, those with substantial savings often end up far better off putting them in offset accounts and saving on mortgage interest repayments.
Few easy access savings accounts pay more than 1.65 per cent gross interest and none pays more than inflation.
Put ?30,000 into a best-buy savings account paying 1.65 per cent and a basic rate taxpayer will have ?396 a year after tax, and a higher rate taxpayer just ?297.
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Put the same money in an offset savings account and if mortgage rates stay at 3.5 per cent you will have made ?1,050 worth of over-payments by the end of the first year alone.
David Hollingworth, mortgage expert at London & Country Mortgages, in Bath, Somerset, says: ?The effective return on savings is certainly better than that available from standard deposit accounts, especially considering there is no tax to pay.?
We?ll get hitched ? and pay off our home loan 11 years early
Soon-to-be married couple Elliot Jones and Andrea Widdows decided to take out an offset mortgage when they bought their first home ? a three-bedroom semi-detached house in Warrington, Cheshire ? in May.
Elliot, 26, who is a mechanic, and Andrea, 24, a veterinary nurse, have a three-year fixed offset with Yorkshire Building Society where they pay a rate of 4.54 per cent.
Elliot says that it was his future in-laws who spurred them to get an offset mortgage after they had used one in the past.
The couple, who are tying the knot in November, have ?20,000 of savings offset against their mortgage debt of ?103,000. But instead of paying reduced monthly repayments, Elliot and Andrea pay the amount they would have paid without their savings, effectively overpaying by roughly ?100 each month.
Or put another way, their offset mortgage also means that the ?20,000 in savings spares them more than ?1,000 a year in interest payments.
Elliot says: ?We?re on a 35-year term but by paying the higher rate we can pay off our mortgage 11 years early.?
He adds: ?It was the flexibility of the deal that really did it for us.
?If we are having a bad month financially, or if one of us gets sick, we can make a lower payment as well.?
Can I withdraw my savings if I need to?
Yes. The beauty of an offset mortgage is that you still have access to your cash ? which is why the deals are great for self-employed people who want a useful home for the money they are saving to pay their next tax bill.
Pay the cash into an offset savings account all year and you can enjoy the benefit until the tax bill is due. Offsets are also good for anyone with a decent amount of rainy day money that is languishing in low paying accounts.
Some offset providers also link any money in your current account into the deal, so the more you have on deposit the faster your mortgage value will fall.
Are my savings safe?
Offset savings accounts are treated in the same way as any other type of deposit account, with any savings of up to ?85,000 (?170,000 for joint accounts) protected by the Financial Services Compensation Scheme if an institution goes bust.
Homeowners with more than ?85,000 in savings could also enjoy added protection should an offset provider become insolvent. This is because savings above the FSCS protection limit would be automatically set off against the mortgage debt. So while you would not get your savings back, your mortgage would be reduced by the equivalent amount.
Who sells offset mortgages?
Most banks and building societies now provide offset deals ? but many keep quiet about them as they know the deals benefit customers more than shareholders.
Barclays and First Direct do promote them, as do new players such as Virgin Money and customer-focused building societies such as Yorkshire, Chelsea, Coventry and Norwich & Peterborough.
Deals vary and while you may pay a premium, the gap between offset and ordinary rates is narrowing. Yorkshire Building Society?s offset deals are only 0.2 of a percentage point more costly than its traditional deals. Other good offset deals include First Direct?s lifetime tracker at 2.49 percentage points above the Bank of England base rate (at 0.5 per cent) for borrowers with a 35 per cent deposit. The fee is ?499.
Ray Boulger, of broker John Charcol in London, says longer-term fixed rates also look good for offset borrowers. Best buys include Yorkshire Building Society?s five-year fix at 2.64 per cent. It is available to those with a 35 per cent deposit, but has a ?1,475 fee.
Want to know more?
Offset mortgages do not suit everyone. They can take a bit of getting used to and high interest rates can take away much of the benefit of the offset terms.
But the right deals can transform homeowners? finances ? so take a look at the offset calculator function at thisismoney.co.uk to see if they will work for you.
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