TTheir heyday came in the late 1990s – early 2000s, but since then they have come out of favor. However, offset mortgages seem to be making a comeback and some brokers are reporting a surge in demand.
They link your savings to your mortgage, so your savings balance is used to reduce or offset the interest you pay on your mortgage. And the renewed interest is due in part to one of the financial side effects of the pandemic: the fact that some consumers have been fortunate enough to accumulate large amounts of “savings while restricting access.”
Many want that money to be on hand – not tied to the stock market – but with savings rates so bleak at the moment, they would like to find a way to make their money work harder.
Likewise, some people have set aside a large sum for something like a major home improvement project or buying other property, but don’t know when or even if it will happen, and in the meantime, the money brings near zero interest. …
With a credit-backed mortgage, you have a home loan and an associated savings account (and possibly your checking account too) with the same bank or building co-op. You offset your mortgage savings, so you only pay interest on the balance. If your mortgage is £ 200,000 and you have £ 30,000 in savings, you only pay interest on £ 170,000.
Some people could potentially shorten the term of their mortgage by several years and save thousands of percent. Since cash savings are kept separate from your home loan, you can access them whenever you want.
“We are seeing growing demand as borrowers seek to capitalize on the cash they have at the bank and we suspect this will continue in the coming weeks and months,” says Chris Sykes of Private Finance mortgage broker.
Ray Boulger of rival broker John Charcola says that credit-free mortgages “can offer very rewarding benefits to some people, and anyone who has accumulated more savings during a lockdown should consider that option when they come to the end of their current deal.”
But he stresses that people need to balance the benefits in order to stick to a standard mortgage loan and use some of their accumulated savings to pay off some of their debt in order to be eligible for cheaper deals that become available as a loan. value (LTV) falls.
In other words, offset isn’t for everyone. Boulder also notes that a relatively small number of lenders offer them, “and interest rates tend to be slightly higher than the cheapest standard deals.”
Suppliers include Scottish Widows Bank, Barclays, Coventry Building Society, Accord. Mortgage (part of the Yorkshire Building Society) and Clydesdale Bank.
They all work a little differently, but usually you choose between using the interest saved to shorten your mortgage or your monthly payments.
Circumstances are different for everyone, which is why many providers have mortgage calculators on their websites for you to play with the numbers.
We used the Barclays calculator to come up with this simplified example. It is based on the fact that someone wants a mortgage with a repayment of £ 350,000 over 25 years on a property worth £ 500,000. They have a savings of £ 50,000 on a 0.5% income and plan to add £ 200 a month to their savings account. Barclays says its two-year tracker, with an initial payout rate of 1.72%, was the lowest mortgage loan rate currently available, based on that person’s 70% LTV.
If the borrower signs up and decides to shorten the term of the mortgage, he could potentially pay off a year and 10 months earlier, saving £ 6,524 in interest. This is because their monthly payments (in this case £ 1,436) are based on the full amount of the loan, even though the interest they have to pay is lower, so they actually overpay every month.
If this borrower chose to cut their spending instead, they could save an average of £ 96 in monthly payments (this amount has been reduced to reflect the fact that they are offsetting their savings). Over 25 years, this would lower the interest by £ 29,000.
There are some serious caveats. For the sake of simplicity, we have adopted a 25-year term, but many people like to move from one deal to another. And, of course, financial circumstances change over time. Ideally, you should be reasonably confident that you can keep significant amounts in a linked savings account over the life of the mortgage.
Boulger says, “The beauty of a creditable mortgage is that it is the only type that effectively allows any overpayment to be re-borrowed without the lender’s availability check. This is because, technically, you are not borrowing more money, but simply withdrawing funds from your linked savings account. “
The aforementioned Barclays deal is available to buyers and re-mortgageers.
Sykes is a fan of Scottish Widows Bank, where compensation is available for all products. Its fixed two- and five-year re-collateral rates start at 1.19% and 1.35%, respectively.
Many of those considering a netting deal are likely long-term, so a long-term flat rate might be appropriate, Bulger says. He stresses that construction company Coventry has set a 10-year fix that delivers up to 65% LTV at 2.39%.