Offset mortgages the smart option for savers
Borrowers with offset mortgages earned £1.4bn more on their savings in the past two years than those who opted for savings accounts, according to research from First Direct.
With interest rates unlikely to rise before next year, savings accounts will continue to pay poor rates of interest. Until this improves, borrowers can make their savings work harder by offsetting them against their mortgage, reducing the interest they pay. This will enable them to clear their mortgage more quickly and pay less interest in the long run, while retaining access to their savings in case of emergency.
In these uncertain times, more of us feel comfortable with a savings cushion i.e. we want to reduce our mortgage but also need to keep some savings back in case of emergency. This makes perfect sense and an offset gives the benefits of overpaying on your mortgage while retaining access to your savings.
Those who have cash sitting in a savings account but who need it for another purpose - such as the self-employed who must pay an annual tax bill - particularly benefit from an offset mortgage. They may not be able to afford to pay off a large chunk of their mortgage but while the cash is sitting in their savings account, it has the effect of reducing the interest they pay on their debt, saving them money.
There are fewer offset mortgages available than before the downturn so it is important to shop around to ensure you aren't paying more than you need to.