It's a difficult time for anyone looking to buy a home. Banks are reluctant to approve mortgage applications and are restricting the type of people they lend to more than ever.
Consequently, the days of the 100% mortgage are all but over and anyone wanting to set foot on the property ladder are finding it difficult to get an affordable mortgage, even if they have the deposit.
But for those would-be homeowners who have savings, there may be a simple solution.
Offset mortgages take into account the amount you have in your savings account, and 'offset' the mortgage loan against it. Put simply, if you have £15,000 in your savings account and your mortgage is £100,000, you'd only pay the interest on £85,000.
With inflation so high (currently 5.2%) and the stagnant 0.5% base rate dragging savings interest rates down, an offset mortgage is one thing which makes having a savings pot worthwhile again.
Benefits of an offset mortgage
Your monthly repayments are based on the full amount but with the reduced interest payments, your mortgage would be paid off much quicker.
One example given by price comparison site MoneySupermarket is this: if you had a £150,000 repayment mortgage over 25 years and £50,000 in a linked savings account (which must remain there for the duration of the mortgage), the interest would only be payable on £100,000. Therefore, you'd pay off your mortgage almost 3½ years early, saving £6,799 in interest repayments!
The savings you hold in the accounts linked to the mortgage don't earn interest. Basically, you agree to 'forgo' this interest in favour of having it deducted from your mortgage. As the rate payable on a mortgage is usually higher than the rate earned on savings, it's not hard to see why this would be a good swap! It also means that you don't pay tax on your savings, as it's not providing you with any form of income.
Things to remember
If you're looking at an offset mortgage you'll need to have both the mortgage and the linked savings account/s with the same bank or building society. You can usually link more than one savings account to the mortgage, but the amount you can do this with will vary with each provider.
The more savings you have, the better deal you'll get with an offset mortgage. So it's worth taking the time to build up the pot as much as you can first. You can also add to your savings during the length of the mortgage to reduce your balance further.
Withdrawal from a linked savings account is also possible, however this will then increase the amount you pay on your mortgage so should only be done as a last resort.