Mortgage borrowers who have savings are in luck!
A new fee-free offset mortgage has been launched with a market-leading rate and a host of features that are enough to put a smile on the face of any fan of flexibility.
That’s as long as you are not a first-time buyer, since the new deal launched by First Direct yesterday is only available to those remortgaging from another lender who have at least 20% equity in their home (though there are other offset deals available for different types of borrowers).
What’s so good about it?
Firstly, the rate of 5.99% (a tracker of 0.99% above Base Rate). Not only is this a great rate for offsets, it’s pretty competitive in the wider mortgage market.
It’s also fee-free, a massive bonus when many tempting deals often come with a £1,000 plus fee lurking in the background.
And the deal has strong offset credentials. You can link your day-to-day savings and your current account to the mortgage -- effectively overpaying the money you have in credit. So instead of earning money on your savings, you save by paying less interest on your mortgage debt.
Why would you want to do that?
Say you have a £200,000 mortgage that you pay 7% interest on and £20,000 in a best buy instant access savings account that you earn 6.51% interest on, before tax.
If you are a higher rate taxpayer, you will earn just 3.9% on that £20,000 of savings after tax, but you will still pay 7% on your £200,000 mortgage.
It makes more sense for you to offset your debts with the money you keep in credit in your accounts. That way, you will be charged less interest on the more expensive debts, and in return you will earn nothing on your savings (so pay no tax).
If you offset your £20,000 savings against your £200,000 debt, you will pay interest on a smaller mortgage of just £180,000. So you’re saving 7% interest on £20,000, rather than earning 3.9%. (The same – to a lesser extent - goes for basic rate taxpayers, who would earn just 5.2%.)
With offsetting, you are charged the best interest rate possible for your whole finances, which can include your mortgage savings, loans, credit card and current account.
The cumulative effect of paying less interest on your mortgage can be enormous, as you pay down your debt and so are charged even less interest, and on and on. During your mortgage you can save tens of thousands of pounds in saved interest and shave years off your mortgage term.
But First Direct is not the only player in the mortgage market to have a tempting offset. Below is a selection of current offers that could be worth considering. Some have been chosen on rate, others because they are available to those with a small deposit, but please tell us if you know of any more.
Lovely and low
Woolwich is one of most competitive offset lenders and has a range of low rate deals. Cheapest is its 5.99% tracker -- matching First Direct’s rate, but only available up to 60% loan to value (LTV) -- so you need a 40% equity stake. If you need to borrow up to 80% the Woolwich rate jumps to 6.49%. It also comes with a fee of £995, which is reasonable but First Direct has the edge here with its fee-free offering.
After that the building societies hold their own on low rate offsets.
Market Harborough has a lifetime discounted offset at 6.1% up to 80% LTV, with a tiny arrangement fee of £195.
Melton Mowbray’s 6.09% lifetime tracker is also competitive, with a £999 arrangement fee. It’s available up to 80% LTV but only as a local deal for local people. Those outside its catchment area will need 25% equity.
If you want to fix your rate Yorkshire Building Society’s two-year fixed rate of 6.09% is a competitive deal. It comes with a fee of £995 but cashback of £500 on completion. The mortgage is available up to 75% LTV.
High loan-to-value lending
For those with a smaller deposit (or level of equity) rates go up by about 0.5% but there are still deals to be found up to 90% LTV.
Intelligent Finance has an offset remortgage deal available at 6.59% up to 90% LTV – a decent rate but it comes with a sting in the tale by way of a £1,499 fee.
If your mortgage isn’t enormous and you can sacrifice a small amount on rate you might be better looking at Woolwich’s offset tracker at 6.69% up to 90% LTV, which only charges a fee of £995.
Better still on fee is Britannia Building Society’s 90% LTV offset, which only charges £499, but the rate creeps up to 6.79%.
Many of these offset mortgage deals are only available direct from the lender, but may still be worth using our mortgage service to get advice on which is the best for you. Our fee-free brokers will always recommend the best deal even if that deal is only available direct.
> Compare mortgage deals at Fool.co.uk
