Here’s one money matter that makes no sense: having savings and a mortgage. Why would you want cash festering in a savings account when you will be paying far more interest on your mortgage than you can earn on your nest egg? But, then again, it is human nature to want some cash sitting around for the ‘rainy day’ or – perhaps a more cheering thought – to save for a holiday or other expense. You can have your cake and eat it however: with an offset mortgage. With these, your savings are linked to your mortgage and this means the interest you owe on your mortgage is cut – because effectively, you’ve cut the amount you’ve borrowed. It’s a bit like overpaying your mortgage – but with access to your cash if you want or need it.
Offsets have been around for a while, but they still aren’t that popular. But maybe now is a good time to consider one. Moneyfacts says that offset mortgage rates are at record lows – the typical fixed rate offset is now 2.07%, compared with 2.65% a year ago, and the average variable is now 2.63% compared with 2.92%. Effectively, that’s the rate you are earning on your savings you offset against your mortgage – and it’s a lot more than you’d get on most savings accounts.
However, offset mortgage rates are higher than ordinary homeloan deals – and they only work if you have significant savings (Moneyfacts suggests a minimum of £10,000). If you don’t have savings, then you should still consider remortgaging as there are tempting deals around at the moment. Tesco Bank now has a five-year fixed rate at 1.82% for those wanting to remortgage and who have at least 40% equity in their home. There’s a fee of £995. You can overpay up to 20% of the outstanding balance too: which is a good idea.
Low interest rates should be seen as an opportunity to repay: it’s unlikely we will carry on with rates at this level for ever. I’m old enough to remember when mortgage rates were well into double figures – this might be ancient history, but who says it won’t happen again?