Don’t get trampled in the offset stampede
Britain seems to be caught up in an offset stampede.
Last year 170,000 offset mortgages, worth almost £30 billion, were taken out – an increase of nearly 50 per cent on 2005 – according to the Council of Mortgage Lenders.
I have one myself and think they’re a great idea.
You ‘offset’ your savings – and, if you choose, the money in your current account – against your mortgage debt.
This means you don’t earn any interest on your savings balance, but you don’t pay any on the equivalent amount of mortgage either, slashing the interest you clock up every month.
You can then opt to reduce your monthly repayment accordingly or, if you leave it at the pre-offset level, you can pay off your debt years early, saving thousands of pounds.
If you have a healthy savings balance, are self-employed and need somewhere to park your tax, or are a higher rate taxpayer who does poorly out of ordinary savings accounts, they can be an absolute boon.
But offsets don’t suit everyone, and it does worry me that some people may be signing up without truly understanding the pros and cons.
If you don’t fit one of the categories above, an offset can end up costing you more than a conventional loan.
And for some people, who simply want the freedom to make occasional overpayments to help pay off their loan early, a conventional loan with flexible features might be far more cost effective.
As with any financial decision, the key is to do your homework first – and that includes the maths.
