Happy Birthday to Offset!

Woolwich recently pointed out that it launched the first offset mortgage in the UK ten years ago. Time flies and offset mortgages have become an established part of the mortgage market with most lenders now offering some sort of offset option.

They weren’t the first flexible mortgages as the Virgin One account had already styled the all-in-one current account mortgage. The offset mortgage overtook in the popularity stakes largely due to the structure and the ease in which borrowers can see how much they owe and how much they have in savings.

Offset mortgages have always tended to be more expensive than traditional mortgages and so it’s important to bear in mind the level of savings that you can offset to make up the difference in rate. However, that margin between offset and traditional products has narrowed opening offset up to a wider audience.

In the current environment they are particularly attractive, as savers have seen their returns diminish. As there is no interest paid on the savings there is no tax and the effective return is at the mortgage rate. A basic rate taxpayer would need a gross savings rate of 5% to achieve the same return as offsetting the savings against a mortgage at 4% and a higher rate tax payer would need to earn a gross rate of 6.67%.

So offset deals are well worth considering and perhaps only now are they really coming of age.

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