Demand for offset mortgages, which allow borrowers to cut monthly interest payments by linking to a bank account with the lender, has surged over the past year as many homeowners look to make the most of savings hoarded during lockdown.
The value of offset mortgages completed by mortgage broker John Charcol in the first four months of 2021 was more than double the level in the same period in 2020 — a much faster growth rate than for other types of mortgage.
Nick Morrey, product technical manager at John Charcol, said: “There are more people with savings who are looking to get them to work harder, but not lose control over those funds. People are using the money for all sorts of things — buying second homes or holiday lets, doing home improvements, paying university fees or paying for a wedding.”
Offset mortgages link a home loan with a borrower’s savings, effectively allowing them to reduce the total mortgage balance and thereby trim their monthly payments and shorten the costs of the loan over its term. A mortgage of £150,000 might be offset by a £50,000 deposit in the savings account, meaning the borrower would make payments only on £100,000 of debt.
Brokers said that, as well as cutting monthly bills, offset mortgages offered a level of flexibility valued by higher earners or those with particular needs, since it could also be used as a form of credit facility, putting funds at the borrower’s immediate disposal.
Ultra-low interest rates have left individuals earning paltry returns on their savings accounts, while lockdown restrictions have limited their spending opportunities, leading to higher savings. The rise of homeworking has meanwhile fuelled demand for property improvements and second home purchases.
Chris Sykes, mortgage consultant at broker Private Finance, which has seen a 20 per cent rise in demand for offsets over the past year, said the money raised might be held back for a prospective second home purchase, allowing the borrower to leap on an opportunity as a cash buyer when one emerged.
Another example might be a self-employed person expecting to pay their tax bills twice yearly. “That money set aside for tax could be offsetting their mortgage while it’s not being used,” he said.
Aaron Strutt, product director at broker Trinity Financial, said the company had arranged a large offset mortgage recently for a financial trader via a private bank. “She wanted to have access to cash to become a partner in the company she was working for,” he said.
Because of its niche reputation, not all lenders offer an offset option, and most of those that do charge a slight premium on their offset rates. The lowest current offset rate is 1.19 per cent on a two-year fix with Scottish Widows — a lender which does not charge such a premium — with a fee of £999.
Moneyfacts, the finance website, said this compared with a wider market rate of 0.99 per cent on a two-year fix, available on remortgages from lender TSB. An even lower rate of 0.95 per cent was unveiled on Friday by Platform, the arm of the Co-operative Bank that lends via brokers, for a two-year fix with a £1,499 fee for those with equity of at least 40 per cent.
Sykes said the “classic” offset customer was a higher earner with substantial housing equity. Many seek to maximise monthly savings by taking out an interest-only mortgage. “If you’re borrowing £500,000 on interest only and you’ve got £500,000 in that account, your monthly payment is zero,” he said.
To qualify for such interest-only deals a single applicant would typically need to earn at least £75,000, or £100,000 for a couple, with more than £400,000 equity in the property or a substitute repayment vehicle such as savings or other investments.
Andrew Montlake, managing director at broker Coreco, said: “It’s not for everyone, but for those for whom it’s clearly beneficial, it works really well. The problem with offset mortgages is not many people know about them and few brokers discuss them with clients. But when people have saved so much over the last 12 months, it’s a product that should be looked at a lot more than it is.”