Borrowers should look to offset
With high inflation and low savings rates, savers are losing money in real terms and this is further exacerbated by the tax deductions.
Defaqto believes that although it is difficult to get a decent return in these conditions, those looking for a mortgage do have an option: the offset mortgage.
There are currently 249 offset mortgages available and Defaqto data shows that the average rate for a 2 year fixed rate offset mortgage at 75% loan-to-value is 3.24% and for a lifetime base rate tracker offset mortgage at 75% LTV is 3.19%.
David Black, Defaqto’s insight analyst for banking, said: “If someone has a mortgage and a reasonable level of savings, the beauty of an offset mortgage is that they will earn interest on their savings at the same rate that they pay on the mortgage.
“As the interest earned on the savings is offset against that payable on the mortgage they don’t actually receive it but, as a result, it’s effectively tax free. If someone is financially disciplined, using an offset could mean that they’re able to pay off their mortgage more quickly.
“Historically, offset mortgages have charged a slight premium over the rates charged by non-offset mortgages but the gap has narrowed significantly in recent years. There is also an advantage in selecting an offset that includes a current account as part of the package, because, when in credit, it will also be offset against someone’s mortgage.”
Defaqto believes those who may benefit from offset mortgages include:
1. Taxpayers (especially higher rate taxpayers)
2. Savers with a reasonable level of savings
3. The self employed
4. Those with sizeable annual bonuses or for whom bonuses represent a substantial amount of their income
5. Those paying school or university fees
6. Buy-to-let landlords