Interest rates on deposits are pitifully low at the moment. But there's a proven way you can still put your money to work: get an offset mortgage. This product links a savings account to your mortgage loan and offsets both of them. The objective is to lessen the amount of the mortgage on which you have to pay interest. For example, if you have got a ?100,000 mortgage loan along with ?20,000 in savings held separately you pay interest on ?100,000 at your mortgage rate and receive taxed interest on ?20,000. However, by having an offset mortgage you give up the interest revenue so that you will just pay interest on the net ?80,000 loan.
The idea is definitely getting more popualr. Offset mortgages made-up 11% of all new mortgages sold in the 2nd 1 / 4 of this year, according to the Council of Mortgage Lenders. That is up from 8.5% in 2008. The primary reason will be the low interest rates available on saving. The majority of individuals savings revenue won't even keep pace with inflation, after tax. So they are much better off using the balance to reduce the higher interest (in most cases) being paid on a mortgage.
Sales of offset mortgages may also be soaring because they're getting more competitive. A short while ago the best offset mortgage rates were still 0.75%-1% higher than the leading conventional mortgage products, says Damian Clarkson on MSN Money. Given that gap has shrunk - typical offset home loan rates are just 0.1% higher.
But before you rush to set one up, be aware of the compensation rules in the event your financial institution goes bust. In the existing terms of the Financial Services Compensation Scheme (FSCS), consumers with an offset mortgage loan would see their entire savings used to cancel out a part of their debt. So if you have a ?200,000 mortgage and ?100,000 in your offset savings account, that ?100,000 would be used to pay down your loan (as opposed to being reimbursed), leaving you with a ?100,000 mortgage loan.
However, there is some good news: only savings above the new ?85,000 Europe-wide compensation limit will be netted off that way. If you consider the same illustration, ?85,000 of your savings would be secure, however ?15,000 will be taken from your house loan. In case your loan provider went bust, you'd be still left with ?85,000 in savings plus a ?185,000 mortgage loan. Every individual gets ?85,000 of savings protected. Thus in case you have a joint offset mortgage, only savings above ?170,000 would be netted of. FirstDirect offers a two-year offset deal at 1.89% above the Bank of England rate with a ?99 fee. You will need a 35% down payment first.
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