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IF YOU want tax-free savings and the chance to pay off your mortgage early, "offset" products are worth considering, especially now that more lenders are providing the security of a fixed interest rate.

Current account mortgages (CAMs) and offsets have only been in the UK since the late 1990s. They started out as niche products but now represent about £30 billion of the mortgage market, according to research from independent analyst, Datamonitor.

They allow customers to offset a range of balances, including mortgages, personal loans, credit cards, savings and current accounts, with one of the biggest advantages being tax-free savings that can be accessed at any time. Because savings and current account balances are generally linked to the mortgage, borrowers only pay the interest on the difference. For example, someone with a £100,000 mortgage and £20,000 in savings would only pay interest on £80,000.

They are also flexible, which means people can over-pay to see off their loan in a shorter time than with traditional mortgages.

First Active brought CAMs into the country in 1997 and Woolwich became the first lender to launch an offset in 1999.

The added benefit of offsets is that the various balances are held in separate pots, so customers have a clear idea of the extent of their savings and borrowings, unlike with CAMs, where all finances are kept in the one pot.

Until relatively recently, most offsets were only available on variable rates, but a growing number of lenders are launching fixed-rate offsets for people who want the security of knowing what their monthly repayments will be further down the line.

This is particularly appealing in the current economic environment, as most commentators are expecting another rise in the Bank of England base rate before the end of the year, following the quarter-point rise to 4.75 per cent in August.

This month, Scottish Widows Bank launched its first fully fixed offset and First Direct unveiled a two-year and ten-year fix.They join lenders including Intelligent Finance, Abbey, Coventry Building Society and Yorkshire Building Society in offering fixed rate offsets.

First Direct's two-year fixed offset has a rate of 4.99 per cent and allows people to borrow up to 80 per cent of the value of their property, while the ten-year fix has a rate of 5.19 per cent. The company says the latter is the longest term fixed rate offset in the market. Scottish Widows Bank is offering a two-year fixed offset with a rate of 5.45 per cent for people borrowing up to 95 per cent of the property's value and 5.99 per cent for those borrowing more than 95 per cent.

Murdo McHardy, head of product development and marketing at Scottish Widows Bank, said: "Until now we only allowed people to offset against the variable part of their mortgage. With base-rate movements at the back of everyone's minds, it is important for lenders to support their customers by offering more security in their products to those who want it.

"This new product offering will not only provide a welcome safeguard on a fixed rate, but also the flexibility of an offset product that ensures your savings are consistently working to reduce your mortgage.

"Only a handful of lenders currently provide fixed rate offset mortgages, but I think this will increase, due to demand."

One of the reasons offsets are becoming more popular is that rates have fallen over the past few months, so they are now more on a par with traditional mortgages. Scottish Widows Bank has carried out an experiment to see how someone can be better off sticking with an offset than switching mortgages every two years to get a better rate (see graphic).

Mark Parker, managing director of Intelligent Finance, said: "Offsets have become more mainstream because there are far more lenders in the marketplace, and this is in turn has made more customers aware of the product type.

"The increased competition among lenders means the pricing of offset has moved from a premium product to being more in line with mainstream mortgages.

"Offsets are pretty comparable to mainstream discounted or tracker mortgages, starting in the region of a discounted rate of 4.85 per cent. After a discount or tracker period, our offset reverts to the our standard variable rate, which is currently around the fourth cheapest in the marketplace.

"We've developed significantly in the past six years, from providing only one offset mortgage product to now providing a range of tracker and fixed products to appeal to a wide range of consumers."

To encourage people to find out how low a mortgage rate they can get by offsetting their savings, current account or ISA, Intelligent Finance has launched a special "Beat the Base Rate" calculator on its website.

Offsets have traditionally been most suitable for people with savings of at least £10,000, but as they have become less expensive, they now appeal to a wider audience.

Paul Reynolds, managing director of independent mortgage advice firm Moneyquest, said: "Offsets can potentially benefit anyone who has a mortgage, regardless of the amount of loan or savings balance.

"The consumers who will benefit most are those who hold large balances in their savings or current accounts, for example, someone who is self-employed and pays a year-end tax bill but holds the money in reserve throughout the year. This money can be used to offset the mortgage and as the interest is being paid to the bank no tax is paid.

"Anyone who has a disciplined approach to their financial circumstances and who makes regular overpayments to their mortgage or contributions to their savings will benefit from an offset facility."

Reynolds recommends anyone considering an offset look at whether they need the full offset facility or whether a flexible mortgage, with a lower interest rate, is enough.

"The level of service you can expect to receive is also something worth researching as you'll be having regular contact with the lender," he says. "With a conventional mortgage the monthly payment is debited from your current account and little or no contact or interaction occurs. With offset your savings and current accounts could potentially be held with the provider and service issues can start to grind on the relationship very quickly."

 

 

JO KENNEDY, 38, who lives off Dalkeith Road in Edinburgh with her partner and three children, was aware that an offset mortgage might suit her circumstances when she visited an independent financial adviser.

Jo said: "I'm a self-employed trainer and consultant in the voluntary sector and had heard from a member of my family that an offset could be a good way to save tax.

"My adviser recommended Scottish Widows Bank's variable rate offset, which I now have. I took this out in 2005 and opted for the same product when I moved house in March this year. I'm happy with it - it's the only way I save."

Jo's variable rate is currently 5.5 per cent.

The Scottish Widows Bank offset account is available alongside its professional and flexible mortgage product and is particularly appealing to the self-employed.

By having an offset account set up alongside a main mortgage account, self-employed customers can use the money that they put aside for tax bills to reduce the cost and term of their mortgage.

Source:  The Scotsman  22nd September 2006