"Cinderella" deal can take years off your mortgage!

If you want to bring your monthly mortgage bills under control, clear your loan years ahead of schedule, or supercharge the return on your savings, you can do all three with an offset mortgage – which could be why many lenders keep such deals firmly under wraps.

Offsets have been dubbed ‘Cinderella mortgages’ – hardworking and effective, but overshadowed by glitzier rival deals. They come into their own when savings rates are low, and there’s never been a better time to consider one.

How do they work?

Offsets deduct the value of any linked savings accounts from your mortgage before working out how much monthly interest you need to pay.

If you have a £150,000 loan and £30,000 in linked savings, say, then you will have to pay interest only on the difference – a much lower £120,000.

If you need to cut your monthly outgoings, then you can ask to pay this lower amount. But if you want to live mortgage-free years ahead of schedule – and save thousands of pounds in the process – then keep paying interest on the full £150,000.

The maths is complicated, but overpaying like this on a mortgage costing 3.5 per cent will bring your balance down to zero, three years and eight months before the standard 25-year  term. Clearing the mortgage that much earlier will knock  about £30,000 off your total interest bill.

What are the downsides?

Critics point to the fact that interest rates on offset mortgages are typically higher than those on best-buy conventional mortgages. But with savings rates so much lower than mortgage rates, those with substantial savings often end up far better off putting them in offset accounts and saving on mortgage interest repayments.

Few easy access savings accounts pay more than 1.65 per cent gross interest and none pays more than inflation.

Put £30,000 into a best-buy savings account paying 1.65 per cent and a basic rate taxpayer will have £396 a year after tax, and a higher rate taxpayer just £297.

Put the same money in an offset savings account and, if mortgage rates stay at 3.5 per cent, you will have made £1,050 worth of over-payments by the end of the first year alone.

The effective return on savings is certainly better than that available from standard deposit accounts, especially considering there is no tax to pay.

It’s the flexibility of the deal that really attracts many people, especially the self-employed, whose  income can be variable. If they are having a bad month financially, or if they get sick, they can choose to make a lower payment until business picks up, or they return to work.

Can I withdraw my savings if I need to?

Yes. The beauty of an offset mortgage is that you still have access to your cash – which is also another reason why the deals are great for self-employed people who want a useful home for the money they are saving to pay their next tax bill.

Pay the cash into an offset savings account all year and you can enjoy the benefit until the tax bill is due. Offsets are also good for anyone with a decent amount of rainy day money that is languishing in low paying accounts.

Some offset providers also link any money in your current account into the deal, so the more you have on deposit the faster your mortgage value will fall.

Are my savings safe?

Offset savings accounts are treated in the same way as any other type of deposit account, with any savings of up to £85,000 (£170,000 for joint accounts) protected by the Financial Services Compensation Scheme if an institution goes bust.

Homeowners with more than £85,000 in savings could also enjoy added protection should an offset provider become insolvent. This is because savings above the FSCS protection limit would be automatically set off against the mortgage debt. So while you would not get your savings back, your mortgage would be reduced by the equivalent amount.

Who sells offset mortgages?

Most banks and building societies now provide offset deals – but many keep quiet about them as they know the deals benefit customers more than shareholders. Deals vary and while you may pay a premium, the gap between offset and ordinary rates is narrowing. Longer-term fixed rates also look good for offset borrowers.

Want to know more?

Offset mortgages do not suit everyone, but the right deals can transform homeowners’ finances so, if you think that an offset mortgage might suit your circumstances, why not give Jacky a call to see if they will work for you.