Daily Mail

Is an off­set mort­gage the best way to beat piti­ful sav­ings rates?

- By Sylvia Mor­ris sy.mor­ris@dai­ly­mail.co.uk Business · Mortgages · Money Tips · Personal Finance · Lifehacks · Banking · Real Estate · Moneyfacts

STARVED savers strug­gling to find a de­cent re­turn may be bet­ter off us­ing their cash to re­duce their mort­gage bills in­stead.

Sav­ings rates have hit a record low after halv­ing dur­ing lock­down, with all the big banks now pay­ing out just 0.01 pc on easy-ac­cess ac­counts.

Any­one seek­ing a home for a size­able sum should there­fore con­sider opt­ing for a so- called off­set deal in­stead.

This is where you stash your sav­ings with the same bank or build­ing so­ci­ety you have your mort­gage with and use the money to re­duce how much in­ter­est you pay.

For ex­am­ple, if you have £20,000 in a sav­ings ac­count linked to an off­set mort­gage of £150,000, you would only pay in­ter­est on £130,000.

With a typ­i­cal mort­gage rate of 2.25 pc on an off­set loan, this will save you £450 a year in in­ter­est.

By com­par­i­son, if you left the same £20,000 in the av­er­age easy­ac­cess ac­count pay­ing 0.22 pc, you would earn just £44 in in­ter­est.

Even with Na­tional Sav­ings & In­vest­ments’ top-pay­ing ac­count at 1.15 pc, you would still only earn £230 a year.

Cru­cially, you can still dip into your sav­ings as and when you need to — although the amount of in­ter­est you pay on your loan will rise if you do.

Whether th­ese mort­gages work out cheaper for you de­pends on both the in­ter­est rate and size of your sav­ings and loan.

There is much less choice with off­set mort­gages, and they are also more ex­pen­sive than an or­di­nary loan.

How­ever, the price dif­fer­ence has nar­rowed re­cently to around 0.25 pc, mak­ing off­set mort­gages more at­trac­tive for some.

Eleanor Wil­liams, fi­nance ex­pert at Mon­ey­facts, says: ‘With the fall in the price dif­fer­ence and the fact that easy- ac­cess ac­counts of­fer rock- bottom rates, this type of mort­gage is set to be­come more pop­u­lar.’

As a gen­eral rule, if your

mort­gage rate is higher than the rate you earn on your sav­ings, you could ben­e­fit from an off­set deal — par­tic­u­larly if you pay tax on your sav­ings in­ter­est.

Moneysav­ingex­pert’s cal­cu­la­tor can help you work out po­ten­tial

sav­ings. Go to mon­eysav­ing ex­pert. com/ mort­gages/ off­set­mort­gage­cal­cu­la­tor/.

For ex­am­ple, if you have £20,000 in sav­ings and a typ­i­cal £150,000 mort­gage taken over 25 years, you would be bet­ter off.

At the av­er­age 2.25 pc rate you would pay £2,870 in in­ter­est in the first year on your loan of £ 130,000 (£ 150,000 less your £20,000 sav­ings).

If you had a nor­mal mort­gage at a rate of 2 pc, you would pay £ 2,960 in in­ter­est on the full £150,000 loan. And, if your £20,000 in sav­ings were in the av­er­age sav­ings ac­count, you would earn £44, re­duc­ing this to £2,916.

Over ten years you would save nearly £1,500 with an off­set, and £7,000 over the full 25-year term.

How­ever, if you only have £5,000 in sav­ings, you would be bet­ter off opt­ing for an or­di­nary mort­gage and sav­ings ac­count.

With an off­set deal you would pay £ 45,523 in in­ter­est over 25 years com­pared to £40,486.

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