Offset mortgages have saved £1.4billion more than the best savings accounts Go compare with our comparison table

Offset mortgages have saved £1.4billion more than the best savings accounts

09 July 2011 / by Rachael Stiles

By using their savings to offset their mortgage debt, homeowners have earned significantly more over the last two years than if they had put their money in the best savings accounts.

According to research from mortgage provider first direct, offset mortgage customers are £1.4billion better off for using their savings in this way.

Using data from their own customers, first direct estimates that 460,000 UK offset mortgage borrowers have seen 'returns' of £1.9billion by saving money on their mortgage repayments, compared to a return of £534million cumulative net interest that they would have received by putting this money in a savings account instead.

Offset mortgages are therefore an attractive option for savers who are struggling to find a competitive interest rate in the current climate, first direct suggests, and they don't have to give up instant access to their cash.

As borrowers attempt to navigate low interest rates and high inflation, the lender has seen a steady increase in the size of savings balances being used for offset mortgages – an average increase of 19 per cent in the last two years, compared to a 2.5 per cent rise in the previous two years.

Amidst ongoing doubt that interest rates will rise in the next 12 months, first direct predicts that borrowers will continue to make better savings with an offset mortgage than the best buy savings account.

Commenting, Richard Tolchard, senior mortgage product manager at first direct, said: "An offset mortgage is an excellent option for those borrowers looking to benefit from a higher rate for their savings. While many UK savers are currently seeing the value of their savings eaten up by inflation as well as being taxed on the interest earned on these savings, no tax applies if they use their funds to reduce their mortgage balance."

Even shopping around for the best savings accounts would not have reaped the same rewards, Mr Tolchard added: "In the current interest rate environment mortgage borrowers could have saved thousands more with an offset in the last couple of years, even if they had diligently been seeking out the best buy savings rates."

© Fair Investment Company Limited

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Representative Example:

A repayment mortgage of £120,000 payable over 28 years and 1 month initially on a fixed rate for 2 years at 1.99% and then on the lender current variable rate of 3.69% (variable) for the remaining 26 years and 1 month would require 24 monthly payments of £465.20 and 312 monthly payments of £565.39 and one final payment of £565.19.

The total amount payable would be £189,357.67 made up of the loan amount plus interest (£68,161.67), booking fee (£999), completion fee (£30) and valuation fee (£197).

In this example the overall cost for comparison is 3.7% APRC representative.