Offsetters £1.4 billion better off than even the best savers over past two years

Over the past two years UK offset mortgage borrowers have earned £1.4 billion more on their savings than those who placed their money in best buy savings accounts, according to research by first direct.

Based on first direct's own customer data the estimated total of 460,000 offset mortgage borrowers in the UK have made a total ‘return' of £1.9 billion over the last two years, compared with only £534 million in cumulative net interest if they had alternatively invested in the equivalent best by saving accounts.

With interest rates at an all time low, finding a safe home for hard earned savings has become extremely difficult, especially for those wanting solid returns and instant access to their cash.
Over the last two years first direct has seen offset savings balances increase steadily as borrowers seek to mitigate the ongoing low interest and high inflation rates whilst protecting their savings from increasing taxes.

The direct bank has discovered that the average offset savings balance has risen by 19% from £27,822 in the second quarter of 2009 to £33,243 in the second quarter of 2011, compared to a 2.5% rise in the average gross loan balance in the same period, from £127,058 to £130,186. This means the average offset saving balance is now 26% of the mortgage balance compared with 22% in the second quarter of 2009 as offsetters seek to benefit from higher savings rates.

The research compares interest earned on savings if customers were to change to the best buy savings rates each quarter and the equivalent savings returns achieved on the same amount by a first direct offset borrower.

Over the last two years a higher rate 40% tax payer would have generated £2,960 more in savings with their first direct offset than if they'd continually moved their money between best buy savings accounts.

With the prospect of rising interest rates in the next 12 months looking increasingly doubtful,
first direct predicts the average offset borrower will continue to earn more in savings interest than in best buy savings accounts.

‘An offset mortgage is an excellent option for those borrowers looking to benefit from a higher rate for their savings. While many UK savers are currently seeing the value of their savings eaten up by inflation as well as being taxed on the interest earned on these savings, no tax applies if they use their funds to reduce their mortgage balance,’ said Richard Tolchard, senior mortgage product manager at first direct.

‘As well as helping them to pay down their outstanding loan, offsets can help shelter savers from the effects of high inflation on their hard earned savings pots. In the current interest rate environment mortgage borrowers could have saved thousands more with an offset in the last couple of years, even if they had diligently been seeking out the best buy savings rates,’ he added.

Instead of receiving interest on your savings, your savings and First Account balances are offset against your outstanding mortgage balance and you only pay interest on the difference between the two. Therefore, you can benefit from the equivalent of the same rate of interest on your savings and First Account as you pay on your mortgage, up to the amount outstanding on your mortgage.

Working example;  An offset mortgage borrower with a loan of £100,000 and a savings balance of £20,000 would only pay interest on £80,000 of the original sum borrowed.