Today, with a lot of offset products, any amount of money can be credited to a current or savings account and used with any level of activity.
Another common myth is that these products are not flexible. Some lenders allow penalty free withdrawals at any time, and money can be deposited into a savings or current account at any point. Small monthly amounts saved in this way can make huge long-term changes to the cost of the mortgage.
A quick calculation shows that on a 25-year term £100,000 offset mortgage fixed at 5.85 per cent until 2029, borrowers who initially put no deposit into a current or savings account but save £100 a month could reduce the time until they pay off their mortgage by three years and nine months compared to a standard five-year fix at 5 per cent (as of August 2023).
Types of clients
For brokers, offset mortgages provide an excellent opportunity to help clients with a different but simple way to manage their finances, and there will be many individuals who could benefit from one of these solutions.
- People with high cash savings – and who are happy to keep it in an account to make the most of the offset benefit.
- Higher and additional rate taxpayers – because interest saved through money stored in offset savings is not taxed.
- Somebody who has received an inheritance – especially if they are not sure what to do with it or are unfamiliar with handling significant lump sums of money.
- The self-employed – for two reasons: first, many self-employed people receive irregular income, so offsetting to minimise monthly repayment bills can be useful; the second reason is that some self-employed people keep a large sum of cash handy for tax bills during the tax year, this can be put to work instead of it sitting in a cash account attracting low rates.
- Buy-to-let landlords – to help with the mortgage repayments for their own residential mortgage and to potentially ease the impact of the recent tax changes, whereby landlords can no longer deduct interest payments when declaring their annual rental income.
The questions to ask
So, how do brokers raise offset mortgages in discussions with their clients? As with any other financial product, a recommendation should only be made after thorough client discovery – this is especially important now that the consumer duty is in full effect.
One question brokers can start with concerns the mortgage goals of the borrower: is the client keen to pay their mortgage off early and has the financial resources to do so? It may then be worth discussing how an offset mortgage could help them achieve that goal.
By contrast, does the client want to access their savings frequently? In this situation, a typical repayment mortgage might be a better choice.
Although withdrawals are often fine, the consistent removal of funds from an offset savings account will negate the advantages offsetting provides.
Finally, for those borrowers with a high income and high outgoings (or with a strong likelihood of outgoings rising in future), an offset mortgage may not be the best option as the interest rates on a regular savings account might provide more value than a small offset benefit.
As with any client, brokers will need to consider whether the product is worthwhile depending on the individual’s circumstances.
An offset mortgage, in allowing savings or current accounts to be linked to an outstanding mortgage balance, is a flexible way of reducing the amount paid on mortgage interest, reducing the length of a mortgage term, or lowering monthly repayments.
Such a product suits people with different levels of savings, including borrowers who often operate with cash savings for specific periods of time, such as the self-employed and higher and additional rate taxpayers because any interest saved does not attract tax.
