Offset ‘best for well-off’
Higher rate taxpayers who have above average savings and are prepared to commit for the long term would see the most benefits, according to the research.
Whilst the majority of borrowers select their mortgage on the basis of the lowest initial interest rate for the type of mortgage they want, there can be significant long term advantages in selecting a current account or offset mortgage.
– financial flexibility
– tax efficiency
– potentially shortening the mortgage term
– avoiding the substantial cost and hassle of regularly remortgaging to get the best rates.
– Low tracker rates over the mortgage term (the average rate for offset mortgages that track the Bank of England base rate for the entire term of the mortgage is actually lower at 5.24 per cent than their equivalent traditional mortgages at 5.42 per cent).
Despite current account and offset mortgages currently taking about 10 per cent of new mortgage lending, and being projected to grow substantially over the next few years, the potential borrower needs to be extremely financially disciplined to make these mortgages worthwhile.
David Black, head of banking at Defaqto and author of the report, said: “If offset mortgages are approached as a fundamental part of the borrower’s financial planning process they can offer great benefits. However, they are definitely products for the long-haul and should not be contemplated unless borrowers are fairly certain that they will be able to leave what can be significant sums of money more or less untouched in savings accounts over the mortgage term.
“Any permanent reduction in the size of the deposit because of withdrawals will result in the borrower paying above market rates for the extra mortgage needed to balance the withdrawn savings.”
For basic rate taxpayers, offset mortgages can still be attractive to borrowers who do not want to get involved in chasing the best saving rate or the cheapest mortgage.
Financial advisers have an important role in explaining and evaluating offset and current account mortgages against traditional mortgages for their clients and this can dovetail neatly in providing clients with a full personal financial review.