As the credit crunch sinks its claws deeper into the British economy, most of us are on a constant look-out for cheap deals and ways to scrimp on our never-ending outgoings. After an initial scare when the economic crisis first started to become a household name, many banks and retailers are now latching on to this trend and are trying to come up with more and better ‘value for money’ schemes than ever before. Even when it comes to mortgages, customers are spoilt for choice between the wealth of options available to make their pennies go further.
One of these new advantageous mortgage deals is the so-called offset mortgage, which has been progressing by leaps and bounds in 2011. An offset mortgage is designed to help you pay off your borrowings faster by ‘offsetting’ your mortgage debt against your savings account. In clearer terms, if you forego the interest added to your savings, then you are exempt from paying interest on the same amount of your debt. The main goal of this mortgage deal is to allow customers to free up more money to spend on their debt, but that is not the only advantage associated with this plan.
By having an offset mortgage, customers are avoiding paying tax on the interest they would have otherwise made on their savings. Some mortgage providers offer offset plans against both savings and current accounts and this can be very useful for those receiving lump sums into their bank, for instance through self-employment, a redundancy payout or an inheritance. Not only do large sums in your account increase the interest-free debt amount, it also ensures you have enough money available to make your regular repayments on time.
Another great value option is the Family Offset Mortgage, currently offered by the Marsden, Newbury and Yorkshire Building Societies. With this family plan, a relative of the borrower offsets a cash amount against the borrowed mortgage. This can be advantageous for both parties – the borrower who lacks the money to put their first step on the property ladder and the family member who can decrease their tax liability by removing their cash from a high-interest bank account.
Bank managers and mortgage lenders offer their undivided support for the offset mortgage, calling it the product of the future. Financial experts, however, warn the public against the potential pitfalls of these apparent financial ‘miracle plans’. The interest rates on an offset mortgage, for instance, are much higher than the cheapest regular rates currently available on the market. So in order for this plan to be really beneficial, you need to have a substantial amount of savings available to offset against your borrowings. By tying up your money in a mortgage plan, you also lose any financial back-up you may need for future financial emergencies. Finally, you have to remember that an offset mortgage is only available to customers with an account at the same bank or building society.
Even bankers agree that the offset mortgage is currently only a viable option for those who already have the means to dig deep into their pockets. But with offset rates constantly being decreased towards regular mortgage rates, first-time homeowners are definitely advised to look into this option. They just have to make sure they eventually decide on the most suitable borrowing plan for their needs.