"About £268 billion, or 21% of all UK households’ savings, were languishing in accounts paying zero interest at the end of 2022."
UK Savings Week (September 18th to 24th), launched by the Building Societies Association, encourages people to create a habit of saving, as well as make better use of the savings people have already accumulated. While many households would benefit from saving more in general, some people have built up substantial savings but never felt the full benefit of doing so, particularly during years of ultra-low interest rates, when most savings products offered smaller returns.
With interest rates and inflation having risen so quickly during 2022 and 2023, saving is more important than ever, but rising household costs are often a more pressing priority, including rocketing mortgage payments. However, lenders have subsequently increased savings rates on easy access savings accounts to help savers make their money go further. The combination of high mortgage rates and a stronger savings rate environment provides an opportunity for brokers to get in touch and engage with clients who may benefit from an offset mortgage.
Why and how offset mortgages can help
About £268 billion, or 21% of all UK households’ savings, were languishing in accounts paying zero interest at the end of 2022, according to Coventry’s analysis of Bank of England data. Billions more are still sitting in accounts paying less than 2% interest. Rates have risen in the past two years, but slowly: by May 2023 the average interest rate for an easy access savings account (across the Big 9 firms) was still just 1.25%, while the average interest rate for fixed term or notice accounts was 2.47%.
The introduction of the Consumer Duty in July 2023 is helping to increase average rates further, but that may mean people with substantial savings end up breaching personal tax allowances. There is a clear need for a low-risk, tax-efficient way to make savings work harder for clients.
Offset mortgages can help. They allow borrowers to ‘link’ their savings to their mortgage account. Clients only pay interest on the difference between the offset savings balance and the mortgage amount, so their savings reduce the mortgage interest they pay.
Clients can benefit either from lower monthly costs, or (with a repayment mortgage) by shortening their mortgage term. Using an offset mortgage could also mitigate, what might otherwise be, very significant increases in payments as existing deals end. Many lenders offer both repayment and interest-only options.
Key benefits
Putting clients’ money to work: Instead of sitting in a conventional savings account paying low rates of return that allow inflation to erode the real value of savings, an offset mortgage allows clients to use this money more effectively, either to cut monthly costs or to reduce the mortgage term.
Easy access to cash: The borrower can choose to withdraw some of the savings used for an offset mortgage, although this will reduce the offset benefit.
Soften the impact of rising mortgage payments or shorten the term: With a repayment offset mortgage, a client can reduce monthly payments or the mortgage term. With an interest-only mortgage they can reduce monthly payments.
Tax efficiency: The value of mortgage interest saved by using an offset product does not count towards a borrower’s personal savings allowance.
Of course, offset mortgages are clearly not suitable for everybody, and brokers will need to help clients weigh the benefits of these products against potential downsides. It is worth noting to clients that no interest is earned on savings used to generate the offset benefit, or on any surplus savings in the account greater than the mortgage balance.
Which clients might be well-suited to an offset mortgage?
Offset mortgages could be a very useful option for clients with relatively large amounts of cash savings who are comfortable using some or all of that money for this purpose. Higher and additional rate taxpayers may be attracted by the tax benefits, while an offset product might be useful for a borrower who has received a substantial inheritance and would like to use it to reduce mortgage payments or shorten the mortgage term.
An offset mortgage might also suit some self-employed clients: as well as reducing monthly costs, the offset product can serve as an accessible, temporary location for money set aside during the year in preparation for paying tax bills.
Finally, offset mortgages are not only suitable to those with higher income, they may be beneficial to borrowers who have the ability to save regularly, with the comfort of knowing their savings are easily accessible.
So, for some clients, UK Savings Week really could be a perfect time to consider a different way of using their savings more productively, resulting in a lasting, positive impact on their financial wellbeing.
