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Offset onset

Offset Amanda Newman looks at the pros and cons of offset mortgages

Do the figures for offset add up to the right mortgage option for borrowers?

Offset mortgages are flexible deals which allow borrowers to link their mortgage to their savings and current accounts. One of the main criticisms of the loans is that they are more expensive than mainstream mortgages.

Virgin One account was the first offset mortgage in the UK in 1997 and more lenders have entered the market. This has helped to close the gap but payable rates are still higher than standard mortgages.

But the rates tell only half the story. For mortgage brokers and clients, the crux of the matter is whether an offset deal will work out cheaper overall than a conventional mortgage and a separate deposit account once the level of interest paid on the savings is taken into account.

With an offset mortgage, any money paid into the linked savings or current account, will not receive interest. Instead, the interest that would have been received will be tax-free and used to pay off the mortgage.

Lenders in the offset market say that as interest rates on deposit accounts are low, taxpayers would be better off with an offset arrangement. They say this is particularly the case for higher-rate taxpayers as the interest they would have received on their savings would be grossed up by 40 per cent.

Coventry Building Society marketing manager, products Edward Sadler says offset mortgages are typically used by professionals and higher-rate taxpayers.

He says: “Savings made on any tax liabilities on interest earned on savings compensates the slight premium on an offset mortgage, which is particularly advantageous for those paying higher rate of tax at 40 per cent,” he says.

Some lenders and IFAs think that for the tax efficiency to work, people need a reasonable amount of savings.

Norwich & Peterborough product manager Richard Barker says: “If you have a £100,000 mortgage and only £1,000 in savings, it is probably not worthwhile offsetting because you will be paying a slightly higher headline rate on your mortgage unless you start off with a small amount of savings but know you are going to increase them quite rapidly.”

Sadler believes that offsets have wider appeal than Barker suggests, not only to people who have big sums to invest or the ability to earn reasonably sized bonuses but also people that save on a regular basis.

He says: “Instead of overpaying on the mortgage, money can be paid into the savings account, which will still reduce mortgage interest payment but people will also have access to their funds.”

There are standard mortgages that offer overpayment facilities, typically, 5 or 10 per cent a year, without penalty but once the overpayment has been made, it is not always possible to draw the money back. Offset deals are more flexible as they allow lump sum overpayments to be made that can then be borrowed back.

For this reason, offsetting can be useful for the self-employed or other people with unpredictable levels of income. Some lenders can also consolidate credit cards and loans under the mortgage rate, which should be lower than the rate of the unsecured loans.

IFAs recognise that some clients will welcome the chance to consolidate their financial arrangements and use the flexibility provided by overpayments, they point out this type of mortgage is far from suitable for everyone.

Independent Personal Financial Management director Luke Gibbon says: “They are a rip-off. I would not recommend them to my clients. I have recommended that a client switches out of hers. When I have looked at offset mortgages in the past, I have always been able to show that my clients would be better off taking a standard mortgage and putting their savings on deposit.

“With an offset, you have got a higher interest rate on your savings but you have also got a higher rate on your mortgage.

“My warning to anyone thinking of offsetting is look at the actual net cost of the interest payments less the interest on savings. Banks and building societies love offsets because they are profitable.”

But Clayden Associates director Daniel Clayden believes there is a place for offset deals. He says: “My opinion is that the Virgin One account is the most confusing. A lot of offsets have separate accounts but clients will still get the benefit of offsetting. I prefer that, as you can see where you are.

“You need to be more disciplined with the Virgin One account, as you have to make sure that you do not overspend. It is almost like a massive overdraft with interest added on top of that.”

He believes the main drawback is it is difficult to find competitive fixed and discounted rates as trackers are the norm. “When comparing mortgages, you should comparing a standard mortgage and the amount of interest you would get n your savings with the offset mortgage. But most offset calculations do not allow you to take into account the interest that you are getting on your savings,” he says.

Clayden believes offset is mostly beneficial for clients who have savings of at least £10,000-£20,000 and it would probably save people money if they switch mortgages every two or three years.

He says: “A lot of providers are putting up redemption charges on standard mortgages, which can make it more difficult for clients to swap mortgages,” he says.

Barclays intermediary business director David Finlay believes there is scope for creativity when looking at offset deals. He suggests they may be useful where clients have a buy-to-let portfolio, as they can put their rental income into a savings account to offset against their own mortgage. He predicts rising demand for deals enabling parents to offset their savings against their children’s mortgages, while still having access to their money.

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