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Your Money > Mortgages Articles > Should your mortgage...
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By Richard Evans The surprise decision by the Bank of England last week to raise interest rates - and predictions from some commentators of further rises to come - will have focused borrowers' minds on whether now is the time to switch to a new mortgage. And as offset Offset mortgages allow those with considerable savings or disposable income to reduce their effective mortgage balance while keeping instant access to their money, so they get the benefit of a smaller mortgage - lower interest payments - without permanently handing over their savings to the lender. You keep your savings in an account with the mortgage provider and "link" that account with your mortgage. The lender then calculates the net borrowing - outstanding homeloan minus savings balance - and charges interest on just this reduced sum. For example, if you have taken out a mortgage of £200,000 and have savings of £20,000, you pay interest on just £180,000. Most offset providers also allow you to link your current account to your mortgage, so every pound you earn reduces your effective mortgage balance. The Yahoo! Mortgage section. Make sure that you're on the best mortgage deal "These loans have certain advantages when rates rise and your finances start to be squeezed," says Ray Boulger of John Charcol, the mortgage broker. "The first thing to do is elect to pay just the interest in your monthly direct debit to the lender. You do not lose out doing this, as the money you could have handed over as a repayment of capital is offsetting your mortgage balance - the difference is, you still have access to it. Now that you are committed to paying just the minimum, you are less likely to fall behind with the monthly payments if interest rates rise, so your credit rating is safer. "Meanwhile, the increased balance in your other accounts built up as a result of going interest-only is there as a buffer if your income falls temporarily below your expenditure. While interest-only is dangerous in the wrong hands, the obvious way to repay an offset is making overpayments into linked accounts - but it does require discipline." However, some lenders don't give you the option, as the minimum payment they allow is the interest on your outstanding mortgage, disregarding any money in linked accounts. Among the major offset lenders, Woolwich does give you this option while Clydesdale doesn't; Intelligent Finance plans to introduce it soon. Interest rates on offsets have traditionally been higher than those on normal homeloans, partly because they are more expensive to administer. However, this "offset premium" has fallen recently, says Mr Boulger, as more lenders enter the market and competition increases. As a result, offsets are becoming more appealing to ordinary borrowers and less restricted to niche markets such as self-employed professionals. "As demand for offsets grows, more lenders will feel they have to offer them. These new entrants will put further downward pressure on the interest-rate premium, creating a virtuous circle of improving competitiveness," he says. "Already there is hardly a premium on some deals." Among Charcol's picks at the moment is an offset lifetime tracker from Hinckley & Rugby building society charging 0.14 percentage points above base rate for the term of the mortgage. With the base rate now standing at 5.25 per cent, this means you would pay 5.39 per cent. "This is the cheapest lifetime tracker on the market, offset or not," says Mr Boulger. "It's cheaper than Woolwich's non-offset lifetime tracker, except for short periods when the arrangement fee of £599 may cancel out the difference in interest rates." If you want a fixed-rate loan as well as the ability to offset, it is harder to find a good rate. This is because of the way lenders fund fixed rates in the money markets so that they do not make a loss if rates rise. With ordinary repayment mortgages, they can predict fairly accurately how much will be outstanding at future times, so they can assess their liability. But net balances on offset mortgages are much more unpredictable, as customers can spend large chunks of their savings without warning. This uncertainty makes it harder for lenders to insure against the markets going the wrong way, but the problem may be alleviated as the market for offsets grows. Fixed-rate offsets are available, though. Mr Boulger points to one mortgage from Intelligent Finance fixed at 4.99 per cent until 1 March next year (the arrangement fee is £599). "This could be good if, as I expect, rates go up and then down within the year. If that happens, the market will be expecting rates to fall further by the time you need to switch again, and your new fix could be better still. But if rates carry on rising you will pay more for a follow-up fixed-rate loan," he says. Switching to an offset loan should be relatively painless. Mr Boulger recommends carrying out the actual remortgage first, then switching your bank accounts to the new lender. "Moving your current account is probably more hassle than moving the mortgage," he says. Once you have the offset up and running, make sure all your savings are in accounts linked to it, rather than at your old bank, for example, so that every penny you have is reducing your mortgage. Some advisers believe flexible mortgages, which allow you to make large overpayments or borrow further money, are more appropriate than offsets for the typical borrower. "Many people need flexibility, which offsets offer, but end up not building up the savings they had hoped for and therefore paying more," says Sarah Gwilt of Dickson Lishman Prince, the independent financial adviser. "Mr and Mrs Average may be better off with flexible loans, such as a 5.09 per cent two-year fix from Northern Rock. You can overpay any amount you like until there is just £1 left on the mortgage or you can borrow more up to an agreed limit at the same rate. But arrangement fees are high - £1,295 for this loan or £999 for a two-year fix at 5.39 per cent." The Yahoo! Mortgage section. Make sure that you're on the best mortgage deal Offsets are still the preserve of the more sophisticated borrower, believes Ms Gwilt. "You need to look at all the figures, such as savings, income, interest etc. I have a spreadsheet that works out when offsets become viable. But they are definitely for savers, not spenders. My offset customers tend to be self-employed professionals rather than the average borrower." The self-employed are often paid without deduction of tax and build up money over the course of the year to pay their tax bill. An offset offers them - and others with fluctuating incomes, such as those who receive much of their income as overtime payments or bonuses - a convenient way to derive maximum benefit from that money but still have it available when the tax bill has to be paid. Also, many such borrowers are higher-rate taxpayers, who would see 40 per cent of any interest on savings accounts swallowed in tax. Again, an offset provides a solution: because no interest is paid on accounts linked to an offset, there is no tax to pay. For example, a higher-rate taxpayer with an offset mortgage charging 6.5 per cent APR would need to have his savings in an account paying 11.08 per cent to receive the same benefit, according to Intelligent Finance (for a basic-rate taxpayer the account would need to pay 8.31 per cent). Some offset borrowers have other tricks up their sleeves. A couple of lenders, such as Intelligent Finance and Barclays, allow cash Isas to be linked to offsets. Although savers receive no interest, they avoid forfeiting their right to save up to £3,000 in an Isa each year. They can keep the Isas going, and start receiving interest on them, after the mortgage has been paid off by other means. "A few of our customers have 'zero per cent mortgages' because they have enough in their Isas to offset their whole loan," says Heather Scott of Intelligent Finance. Ray Boulger, meanwhile, says one of his customers has offset his entire £60,000 mortgage as a result of spending that sum on interest-free credit cards. "He will keep transferring the credit card balances to other interest-free deals as long as he can," says Mr Boulger. "But if he needs to pay any off, he has the money sitting in his bank. Meanwhile, he has an interest-free mortgage." Useful links:
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