Little-known mortgage can slash the interest you pay by £1,000s and reduce your deposit too
A LITTLE-KNOWN mortgage can slash a borrower’s interest rate and reduce their deposit for a new home too.
Offset mortgages allow borrowers to link their mortgage and savings together.
These deals work by reducing the interest paid on a mortgage by pegging some of what’s owed to the amount held in a savings account.
Best of all, borrowers can still access the cash in their savings pot if needed.
But if you do dip into your savings it will affect the amount of interest you pay.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Offset mortgages are not as popular as they should be, given the potential benefits.
“Borrowers are put off by limited availability and higher pricing, even though the net effective interest rate paid could be lower than that on non-offset products.”
They’re also a useful method for parents with cash savings to help their children get on the property ladder without having to splurge on gifting money towards a deposit, according to experts.
The advice comes as the Bank of England’s base rate sits at 4.25%.
With the average two-year 85% loan-to-value fixed mortgage deal costing 4.79%, according to Rightmove, considering an offset deal now could be wise.
How does an offset mortgage deal work?
If you had a £250,000 mortgage and £25,000 in savings offset against it, you would only be charged interest on the difference, that being £200,000.
Mike said: “Offsetting has the same effect as overpaying your mortgage but the difference is that you can access your savings at any time.
“If you overpay, it can be difficult, if not impossible, to get hold of your cash again.”
With offsetting you have complete flexibility and if you need your money in an emergency, such as to replace the boiler, it is there for you to access.
David Hollingworth, associate director at L&C Mortgages said: “While you don’t earn any interest on the savings held in the account they reduce the amount of interest payable on the mortgage.
“That means that the return on the savings will effectively be at the mortgage rate.”
This makes the account even more favourable during times when savings rates are poor.
However, with savings rates on the up, it’s always wise to assess the pitfall of these mortgages before you commit.
What are the pitfalls of offset mortgages?
While offset mortgages can be useful there are still a number of pitfalls.
Firstly, these mortgages tend to cost slightly more than standard, non-offset deals in return for the flexibility you get.
You’ll also have to hold the mortgage and savings with the same provider making deals far and few to come by.
There’s also the importance of taking into account rising savings rates.
Mike said: “Offset mortgages have worked well over the past few years when savings rates have been poor.
“If your money is earning next to nothing in the way of interest, then it makes sense to offset and reduce the interest you pay on your mortgage instead.
“However, when savings rates are rising, as is the case now, you might be able to find a better option so it is worth checking whether this is the case.”
Tips for getting the best mortgage deal
If you’re looking for a traditional type of mortgage instead, getting the best rates depends entirely on what’s available at any given time.
But there are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio has changed this could also give you access to better rates than before.
A change to your credit score or a better salary could also help you access better rates.
If you have a fixed rate, you could see higher rates when you come to the end of the current term after the BoE rise rises.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare for you, but you may have to pay for this service.
It could cost a couple of hundred pounds but it might save you thousands on your mortgage overall.
You’ll also need to factor in fees for the mortgage, though some have no fees at all, or you can add it to the cost of the mortgage, but beware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember, that you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks, and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.