Demand for offset mortgages, which allow borrowers to lower monthly interest payments by linking them to a bank account with the lender, has increased over the past year as many homeowners seek to make the most of the savings hoarded during the lockdown.
The value of offset mortgages taken out by mortgage broker John Charcol in the first four months of 2021 was more than double that of the same period in 2020 – a much faster rate of growth than other types of mortgages.
Nick Morrey, Technical Product Manager at John Charcol, said, “There are more people with savings who are trying to get them to work harder but not losing control of those funds. People use the money for all sorts of things – buying a second home or vacation rental, doing home improvement, paying university fees, or paying for a wedding. ”
Offset mortgages link a home loan to a borrower’s savings and allow them to reduce the overall mortgage balance, thereby cutting their monthly payments and reducing the cost of the loan over its term. A £ 150,000 mortgage could be offset by depositing £ 50,000 into the savings account, meaning the borrower would only make payments on debts of £ 100,000.
Brokers said that offset mortgages not only lowered monthly bills, but also offered a level of flexibility appreciated by higher earners or those with special needs, as they could also be used as a form of credit facility to the borrower immediately To make funds available.
Because of the extremely low interest rates, individuals have seen poor returns on their savings accounts, while lockdown restrictions have limited their spending options and resulted in higher savings. Meanwhile, the surge in homework has fueled demand for home improvements and second home purchases.
Chris Sykes, mortgage advisor at Broker Private Finance, whose demand for compensation has increased 20 percent over the past year, said the money raised could be withheld on a potential second home purchase so the borrower could take advantage of an opportunity as a cash buyer rather than one showed up.
Another example could be a self-employed person who expects to pay his tax bills twice a year. “The money earmarked for taxes could pay off your mortgage as long as it is not used,” he said.
Aaron Strutt, product director at broker Trinity Financial, said the company recently arranged a large offset mortgage for a financial trader through a private bank. “She wanted access to cash so she could become a partner in the company she worked for,” he said.
Because of its reputation in the niche, not all lenders offer an offset option, and most do that charge a slight premium on their compensation rates. The lowest current offset rate is 1.19 percent on a two-year fix with Scottish Widows – a lender that does not charge such a premium – with a fee of £ 999.
Moneyfacts, the finance website, said this compared to a broader 0.99 percent market rate on a two-year fix available on lender TSB rescheduling. An even lower interest rate of 0.95 percent was announced Friday by Platform, the branch of the credit union that lends through brokers, for a two-year fix with a fee of £ 1,499 for those with equity of 40 percent or more.
Sykes said the “classic” offset customer was a high-income earner with significant equity. Many try to maximize monthly savings by taking out an interest rate mortgage. “If you only borrow £ 500,000 on interest and you have £ 500,000 in that account, your monthly payment is zero,” he said.
To qualify for such interest rate deals, a single applicant must typically earn at least £ 75,000 or £ 100,000 for a couple with more than £ 400,000 of equity in the property or a replacement repayment instrument such as savings or other investments.
Andrew Montlake, General Manager at Broker Coreco, said, “It’s not for everyone, but it works really well for those for whom it is clearly beneficial. The problem with offset mortgages is that not many people know about them and few brokers discuss them with clients. But if people have saved that much in the past 12 months, it’s a product that should be looked at a lot more than it is. “
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