Simon and Ellen Porter have boosted their savings pot by over £40,000 in the last 13 years, simply by opting for an offset mortgage.
The couple bought their £427,000 four-bedroom home in Portishead, Somerset, in 2011, and opted for a 25-year interest-only offset loan in a bid to increase the amount of savings they had.
An offset mortgage essentially links your savings account, or in some cases your current account, to your mortgage with the same bank.
When you make a payment on your mortgage, the amount is “offset” by the balance of your savings account, and the interest is calculated on the difference between the two.
For example, if you had a £427,000 mortgage and £65,000 in your linked savings account like the Porter’s, you would only pay interest on £362,000 of the mortgage.
This has saved them thousands in interest over the life of the loan and has meant the couple have been able to boost their savings pot by £41,994 in the last 13 years.
Ellen, 51, told i: “We heard about Coventry Building Society’s offset mortgage deal from our mortgage advisor at the time.
“Simon and I always try to be savvy with our money and we loved the idea of reducing our monthly mortgage payments by putting money into a savings account which is set up alongside with an offset mortgage. The savings account is also fully accessible, so we are able to dip into it to fund various spends if we want to.”
They started with around £65,000 in savings which reduced their initial monthly mortgage repayments from about £580 per month to about £440 per month.
They run the offset savings account along with other investments like individual stocks and share ISAs, which they hoped would generate enough return to pay off the remaining balance.
Ellen said they have dipped into their offset savings pot over the years for house improvements and holidays, but have added to it too, and their balance now stands at £106,994.
It means they pay £109 a month on their 1.59 per cent five-year fixed rate, which ends in June 2025.
Ellen added: “If you have some cash stored away in the bank and enjoy saving your money then an offset mortgage is a great option. This will reduce what you pay each month, and you can also access the money at any time which is a huge bonus.
“Over more recent years, we have been able to pay larger chunks of our mortgage off because we chose this type of mortgage all those years ago.”
However, many offset mortgages come with higher rates than fixed alternatives and can also be hard to come by.
Offset mortgages were popular in the late 90s and early 2000s, but since then have fallen out of favour. However, some brokers have reported increasing demand for them, saying that they appear to be making a comeback.
In 2008, almost 10 per cent of new mortgages were offsets, according to the trade association UK Finance. In February this year, just 1.1 per cent of new mortgages were offset.
However, Justin Moy, managing director of EHF Mortgages, told i his firm have seen more and more enquiries about offset mortgages in recent months.
He said: “We have certainly seen higher demand for offset mortgages recently. They are ideal for those with good savings balances, or receive regular bonus or commission income, as it allows the borrower to either reduce their mortgage payments or repay their mortgage earlier, enjoying a better return on their deposits.
“When mortgage rates are higher, that saving can be considerable saving thousands in interest costs over the duration of the term.”
Simon, 47, and Ellen managed to save £1,893 in interest over the past year alone, they said.
But only a handful of lenders currently offer offset mortgages including Coventry Building Society, Accord Mortgages, Scottish Widows Bank, Clydesdale Bank, and Barclays.
Despite this, if you can find a good deal, David Hollingworth, associate director at L&C Mortgages said that right now could be the perfect time to consider an offset mortgage.
He said: “Although the current climate could be a perfect time to consider offsetting, there isn’t an enormous range of offset options on the market. The rates on offset deals are typically higher than a standard deal so it will suit those that will be able to make good use of the offset functionality.
“Those with only a small proportion of the mortgage in savings could find that they are paying a higher mortgage rate that isn’t made up through the benefit of offset.
“As a result, offset is still a relatively small proportion of the market. A few lenders continue to support the market but as we are now in a higher rate environment it would be good to see improved choice for what remains a really useful product.”
Pros and cons of offset mortgages
Offset mortgages won’t be the right choice for everyone. Here are the things you should consider below:
Pros
1. Flexibility: You can choose to make lower monthly payments and still pay back your loan over the full term.
2. Your offset savings will not earn interest so you have no tax to pay on them. But you’re still, effectively, getting a return from those savings by reducing the amount of interest you pay on your mortgage.
3. Offset mortgages allow you to access your savings at any point without having to remortgage.Cons
1. Rates are generally higher than if you took the equivalent loan on repayment terms. This is partly because the market is quite limited.
2. You will need a fairly large deposit of at least 20 per cent (25 per cent with some lenders).
3. Although your savings remain accessible, you will need to bear in mind that making a withdrawal will lessen the benefits you receive using this type of mortgage.