Popularity of “Offset” Mortgage Grows as Homeowners Strive to Make Savings

Faced with the prospect of ever-increasing mortgage payments and skyrocketing energy bills, households across the UK are being forced to explore all available options to make meaningful savings. Remortgaging to reduce interest rates for a fixed period of time is a popular option, but genuinely cost-effective remortgage deals are becoming increasingly thin on the ground.

Elsewhere, others are turning to a lesser-known facility to reduce their monthly payments and bring their mortgage rates down to a more manageable level. The popularity of “offset” mortgages is growing at a rate not seen in some time as homeowners strive to do everything within their power to make ends meet.

New figures suggest that applications for offset mortgage facilities increased by around 400% in September and October, compared to the same time last year. An offset mortgage provides homeowners with the opportunity to use their savings to “offset” some of their mortgage costs, though, for this reason, the facility is open only to those who have considerable savings at their disposal.

What is an offset mortgage?

With an offset mortgage, the borrower is required to deposit a chunk of their savings into an account that is linked directly to their mortgage. This sum of money is then used to offset the remaining balance on their mortgage, meaning that subsequent interest payments are calculated on the balance of the mortgage less the balance of their linked savings.

This provides those with considerable on-hand savings with the opportunity to significantly reduce their mortgage term and, in doing so, access cheaper rates. For example, a standard mortgage currently attaches an interest rate in the region of 6.5%, whereas the average two-year fixed-rate offset deal charges a much lower 5.5%.

In practice, a mortgage payer with a 25-year £400,000 mortgage charged at 5.5% who offsets £40,000 with their savings could save more than £98,000 over the life of the loan. They would also repay their mortgage three years and three months earlier.

But while the popularity of offset mortgages is growing, their availability remains comparatively sparse on the High Street. More mortgage payers are looking to offset their loans, but figures from Moneyfacts suggest that the number of offset mortgage facilities available has fallen by as much as two-thirds over the past 12 months.

Today, there are just over 50 offset deals available on the market as a whole.

“Lots of our clients like the flexibility these deals provide, especially if they are planning to help a family member on the property ladder and need access to a lump sum for the deposit or they have upcoming development works,” said Aaron Strutt, of broker Trinity Financial.

“Others like to have the money ready to pay school fees, and business owners like to offset mortgages when they receive lump-sum payments.”

Millions of mortgage payers face a three-fold interest increase

While analysts now believe that interest rates will peak at lower-than-expected highs next year, millions are facing the near-inevitable prospect of a massive rise in their monthly mortgage payments.

According to a study carried out by Morgan Stanley, around 40% of introductory mortgage deals are set to expire within the next 12 months. This will leave those exiting low introductory rates facing the prospect of interest rates up to three times higher than they are currently paying. As it stands, the current rate payable on a two-year fixed mortgage (following any introductory rate offers) is around 6.55%.