Offset mortgages are better suited to higher-rate tax payers who have above average savings and are prepared to commit for a long period, new research from Defaqto claims.
The research report says while the majority of borrowers select their mortgage on the basis of the lowest initial interest rate for the type of mortgage they want, there could be significant long-term advantages to selecting an offset mortgage.
The report says these include financial flexibility, tax efficiency, a potentially shortened mortgage term, plus avoiding the hassle of regularly remortgaging to get the best rate and lower tracker rates over the mortgage term.
But Defaqto says despite offset mortgages taking about 10% of new mortgage lending and being projected to grow substantially over the next few years, potential borrowers need to exercise a lot of financial discipline to make the mortgages work.
David Black, head of banking at Defaqto, says if offset mortgages are approached as a fundamental part of a borrower's financial planning process they can offer great benefits. But they are also products that must be viewed in the long term and should only be contemplated if borrowers are reasonably sure they will be able to leave what can be significant sums of money in a savings account for the life of the mortgage.
“Any permanent reduction in the size of the deposit because of withdrawals will result in the borrower paying above market rates for the extra mortgage needed to balance the withdrawn savings,“ he adds.
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