How to beat low savings rates with an offset mortgage

SIMON LAMBERT: Could you get busy doing nothing, beat duff savings rates and clear your mortgage early?

Four years ago I made the decision to save money through inertia.

Although it wouldn’t lower our rate, we switched to an offset mortgage.

I was fed up with low savings rates, but like many also prone to leaving money in the bank rather than making sure it went into the best deal possible.

My wife and I also harboured ambitions to try to get our mortgage paid off earlier than its end date.

Balance your savings against your mortgage with an offset and you only pay interest on the difference – keep payments the same and you’ll clear your mortgage earlier

The beauty of an offset mortgage is that it can allow you to act on both these things. You forgo savings interest, but balance your current account and savings against your mortgage debt and only pay interest on the difference.

Keep payments the same as at standard repayment mortgage level and you will clear the debt quicker.

As mortgage rates tend to be higher than savings rates, this means you are getting a better effective rate of return. It’s also tax-friendly, as you would pay interest on savings outside of an Isa or above the personal savings limit.

Over the past four years, savings rates have got even worse and then slightly better.

After hovering at about 1.3 per cent for some time, the best easy access savings rate has now climbed to 1.5 per cent, thanks to Goldman Sach’s new bank Marcus.

Our mortgage rate has consistently been a fair bit above this level, so we’ve been getting a better return on cash throughout.

Meanwhile, the base rate has been cut to 0.25 per cent, gone back to 0.5 per cent, and then finally risen to the heady heights of 0.75 per cent. That matters to us, as we have a tracker mortgage, but the rise was heavily cushioned by the savings balance set against it.

Obviously, we could have probably profited more by investing it – something that looks particularly rewarding with the benefit of hindsight.

However, that involves an element of risk and I invest separately anyway. I’ve also reasoned that clearing our mortgage early, is an investment in our future.

Best offset rates 

Not all lenders offer offsets, the main players are First Direct, Coventry BS, Yorkshire BS, and Scottish Widows.

Among the top offset mortgage rates at 60% loan-to-value are:

Five-year fixes

Scottish Widows – 1.94%

Coventry BS – 2.09%   

(Non offset: Skipton BS at 1.82%) 

Two year fixes 

Yorkshire BS – 1.68%

Coventry BS – 1.69% 

(Non offset: YBS at 1.38%) 

Check the best offset and standard deal for your circumstances with our mortgage calculator

The advantage of an offset instead of overpaying is that it is completely flexible. We can take money out of the linked savings when we want.

Meanwhile, our mortgage is structured so we could even withdraw all the balance that we’ve repaid over the past four years. (Not that I see us doing that.)

An offset mortgage has suited us well, as due to family circumstances and my wife being self-employed and needing to hold money for tax and business savings, we’ve had a healthy enough balance for the benefit to outweigh the slight premium on the rate.

Your circumstances may be different, but if you’ve got decent cash savings and a mortgage, then an offset can pay off. 

And that’s why I wrote this column, not to blow my own trumpet on what turned out to be a good decision, but to flag a lesser-known product that I think some readers might like.

Offset mortgages are fairly unusual and not all lenders do them, but if you can make them work for you, then they are worth considering.  

They are also my kind of money-saver – one that involves doing almost nothing.

At no point over four years have I had to worry about duff savings rates, or leaving money sat in my current account.

I suspect many of our readers with mortgages would like that too.