Offset remortgages
Eyeing up an offset or all in one deal? Do the sums to make sure it’s
definitely the best deal for you, says Olly Morrison
If you’re mulling over switching to an offset deal or an ‘all in one’ mortgage,
now’s a good time. Competition has driven interest rates down on these products
and improved choice. But they are still more expensive than traditional deals
and you must remember to do your sums, or get a broker to do them for you. They
are not always the financial holy grail that lenders like to make out they are.
The point of an offset deal is to slash the overall cost and length of your
mortgage. Your savings and current account are linked with your home loan and
interest paid on the difference. So if, for instance, you’ve got a £130,000
mortgage and savings of £30,000, you’ll pay interest on just the £100,000. You
can keep your monthly mortgage payments on the original £130,000, meaning in
practice you’re continually overpaying your home loan so it will be paid off
earlier. A tax benefit of sorts is an upshot. The savings offset against the
mortgage won’t earn interest, but neither will the Government be taking a bite -
interest on savings is taxed like all other income. Current account, or
all-in-one deals, work exactly in the same way, except all your credits and
debts are kept in one account and don’t remain separate.
But here’s the catch. Interest rates on offset and current account deals, while
lower than if you’re paying your lender’s SVR, tend to be higher compared to
more standard discounted, introductory and fixed rate products.
So although your savings and current account balances will help reduce the
overall cost of the mortgage, as your monthly payments are higher than is
totally necessary you might be no better off. Borrowers with savings of over 30
per cent of the mortgage amount can be sure that the amount saved in total will
outweigh their monthly repayments. But if you’ve less than that it’s touch and
go. You’ll need to work out that monthly repayments won’t be in excess of what
you’ll save in overall interest. James Cotton at the broker London and Country
says: “Offset deals will tend to have a higher rate than standard schemes, so
you do need a certain amount of savings to make them worthwhile. Offsetting at
least 15 per cent to 20 per cent of the mortgage amount is usually a good
benchmark.” But he adds that as offset deals are becoming more and more popular,
the rates on offer are getting more competitive. “A lower rate means that less
savings are needed to make them worthwhile which in turn means that more and
more people can benefit.”
FLEXIBILITY
Lenders promoting offsets stress they can bring you benefits without any savings
because of the fully flexible features on offer, such as the ability to over and
underpay your mortgage or take payment holidays -when you can stop repayments
altogether for a few months (typically four). These facilities may be of
particular use to borrowers with fluctuating incomes, such as the self-employed,
and those wishing to prepare for a period when their income will reduce, like
those planning a family. But if you take advantage of these facilities it might
mean you’ll miss out on the chance to slash interest and cut the term of
mortgage -probably the reason you got an offset in the first place. Something
like a payment holiday, for example, won’t be a free ride as the interest you
stopped paying is simply added to the mortgage. So unless you start overpaying
once the payment holiday stops, you’ll be extending a few months of interest on
top of the mortgage term and be left paying interest on interest. Many of these
flexible features are also increasingly becoming de rigeur on all types of
standard, cheaper mortgages, in any case. Elliot Nathan, product development
manager at the broker Charcol, says: “People believe that they need to take out
an offset to obtain a high level of flexibility. But many mainstream deals offer
much better rates with flexible features such as the ability to make
overpayments and take payment holidays.” If you’re not fussed about unlimited
flexible features but simply want the ability to overpay your mortgage so you
can reduce its length and save a bucket load on interest in the process, you
could probably consider any standard mortgage. Overpayment facilities are
becoming de rigour all types of deal - typically by ten per cent of the balance
a year. If you want to over pay on a standard deal just check the interest is
calculated daily - not annually as has traditionally be the case and which will
mean any overpayments won’t have the full effect.
An alternative would be to remortgage
to a lesser amount using your savings. Remember, though, that with these options
you will be giving up your savings and spare funds each month. An advantage of
an offset is that you’ll have access to your savings at all times. As so many
new deals boast offset and flexible features, borrowers need to decide if they
want to pay a premium for a fully flexible deal or opt for a cheaper, more
standard product with features attached. A lot depends on what features you
realistically expect to make full use of. Current account deals, for example,
give you access to more funds even if you’ve not been overpaying your mortgage -
called a drawdown facility. This is essentially the promise that you can
increase the size of your mortgage by a pre-approved amount and at the drop of a
hat. You can often access the funds by simply writing out a cheque. Many fully
flexible customers take advantage of a drawdown facility to seize the day and
fulfil lifelong dreams. They are visiting far away places and buying second
homes and vintage cars, for instance.
Remember the money still has to be paid back. Lenders can tend to over-glamourise
a drawdown facility, which is essentially a personal loan but with the interest
rate the same as your
mortgage. This
rate may look considerably cheaper than a personal loan, but it will be
meaningless should you pay the loan back over the same period of your mortgage.
Watch out for extending, say, a three-year car loan into a 25-year one as you’d
dramatically increase the amount of interest you’d pay. The way around it would
be to pay off the sum drawn down (with help of your overpayment facility) within
the same period as you would with the car loan.
COMPETITION
If you’re pondering an offset deal, as well as doing the sums you should
thoroughly search the market, says Hollingworth. Heightened competition among
lenders is forcing rates to tumble. He says: “For a bench mark look for an
ongoing rate of around 0.5 per cent above the base rate, then you’re looking a
pretty good deal.” He adds: “More fixed rates are available which is relatively
new, there’s a wider product spread and more choice of rates.” Short-term fixed
and discounted offset deals becoming very popular compared to the long-term
offset deals that you have for for life. The difference between a short-term
offset fix and normal short-term fix is that rate will be slightly higher. But
James Cotton says: “Short term deals are becoming more popular but the long-term
deals will have no early repayment charges and are the most flexible.” Watch out
that a short-term discount doesn’t revert to a higher than normal rate at the
end of the introductory period, or also try and sting you with early redemption
penalties, warns Elliot Nathan. He says: “What we like to see in offsets is no
redemption penalties as if rates went up it would be nice for clients to get out
without any charges.”He says there’s currently a 50-50 split between offsets
with and without early redemption charges. Those with will typically sting you
three per cent of your mortgage amount should you leave the deal. Although
remortgagers should always demand valuation and legal costs to be waived, also
look out for upfront arrangement fees of
between £299 and £599 on top of these. An example of a competitive offset is
Clydesdale Bank’s deal with the interest rate set at 0.59 above the Bank of
England base interest rate for the life of the loan. Borrowers will need a
minimum 15 per cent deposit, the arrangement fee of £449 can be added to the
loan, valuation and legal fees are waived. There deal also boasts a ‘drop-lock’
facility whereby you can opt for a fixed rate in the event of an interest rate
hike. If you don’t like the fixed rate there are no early redemption penalties
so you can switch to another deal without being stung any charges.
IS AN OFFSET OR CURRENT ACCOUNT MORTGAGE RIGHT FOR ME?
Ask yourself the following;
do I have significant savings?
is my current account usually nicely in credit?
can I afford to overpay on my mortgage each month?
am I financially disciplined and astute?
am I prepared to shift all my current finance and direct debit?
have I got an open mind to the reality of my debits and savings?
if my mortgage has a host of features, will I use them all?
Case study - Current Account mortgage
Mark Hughes used his all in one mortgage with the One Account to snap up this
stylish motor home. He imported the 21 foot vehicle from the United States,
setting him back around £15,000, which he obtained thanks to his drawdown
facility on the mortgage. “Before I had the One Account I wouldn’t have able to
it, he says. “I would have just had to hoped to win some money. It’s the first
time I’ve ever done anything like this. With my previous mortgage where I just
paid out a set amount each month and I wouldn’t have considered a personal loan
as I don’t see the point of borrowing money at a high rate.”
Case study - offset -
“I love the tax perks and I hope to have paid off the mortgage a few years
earlier,” says Edward Scott . The 38-year-old architect from St Albans switched
to an offset deal two years ago. He used to opt for discounted or discounted
variable rates. “I’m a higher rate tax payer, I can’t open any more ISA’s and it
really winds me up when the Government pinches a share every month. So I figured
I’d use my savings to try and pay the mortgage off early. “I thought about
getting a standard deal that would let me overpay by as much as I liked, but I
spoke to my broker and we worked out I had the savings to make an offset work.
It means I’ll also still have access to my savings, whereas I’d lose them if I
just overpaid with a traditional type deal.” He also plans to use the host of
flexible deals on offer with his offset deal. “I went travelling when I finished
Uni and it’s definitely something I’d love to do again - especially before I
turn the big 40. I’m thinking of maybe using something like a payment holiday to
do that, so I can forget about the mortgage for a while, but nothing’s set in
stone yet.” However, he doesn’t want to ruin the chance to slash his mortgage
term. “Of course, I’ll make sure I start overpaying the mortgage as soon as I
get back as I still want to make sure I’m mortgage-free as early as possible in
my life.”
He adds: “People say offsets are more expensive than normal deals, but that’s
compared to discounted and introductory rates. I know plenty of people who are
paying SVRs and I still have cheaper rate than them.”
This article has appeared in Mortgage Magazine which is available in all good
newsagents. Copyright MSM International Ltd
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