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Offset tracker mortgages are fairly new in the market place. They combine the benefits of an interest rate that tracks the Bank of England’s base lending rate, with the ability to ‘offset’ the interest earned on savings and current account against the interest charged on the mortgage.
The ‘tracker’ part in offset tracker mortgages appeals to the borrower who wants the security of an interest rate that can start out fixed for a year or so, and then turn into a tracker. The interest rates are charged at a set percentage above the Bank of England’s base lending rate for the rest of the mortgage term. When the Bank cuts it base rate, the lender will pass the full amount of the reduction to the borrower. On the flip side, if the Bank increases it rates, then the interest rates go up by the same amount. Some lenders offer the benefit of a ‘droplock’ facility, which allows the borrower to drop into to a fixed rate when the timing seems right.
Offset tracker mortgages should not be confused with variable rate mortgages. Standard variable rates (SVR) are set at the lenders discretion. They are generally 2 percentage points above the Bank of England’s base lending rate. For example: if the base lending rate is 5.7% then most SVRs will be around 7.7%
The ‘offset’ part in offset tracker mortgages allows the borrower’s cash savings to be set against the mortgage debt, so they pay interest only on the balance. The monthly mortgage repayments are calculated on the full debt before offsetting is taken into account, and so the borrower effectively overpays on the debt each month. This means the mortgage debt is cleared much faster than with a conventional loan. For example: a £100,000 mortgage with an offset tracker loan rate of 5.24% would save more than £39,000 in interest repayments. The loan would be paid off 5 years earlier than a mainstream mortgage of 25 years.
Offset mortgages are also flexible and allows the borrower to pay off the mortgage early without penalty and make underpayment and payment holidays; although the borrower normally has to make sufficient overpayments throughout the year to qualify.
Offset tracker mortgages have higher rates than mainstream mortgages because of the flexible features they offer the borrower, and the high administration costs of calculating the interest payments on a monthly or daily basis. For an offset deal to be advantageous to the borrower, it is advisable for higher rate taxpayers to have at least £10,000 in savings and basic rate taxpayers to have at least£20,000 in savings to offset against a £100,000 mortgage.
For many people the flexibility of an offset tracker mortgage outweighs the higher rates that are charged. For example, one borrower has had an offset tracker mortgage for seven years. He said it was the flexibility of the mortgage that appealed to him: he had remortgaged his home to release some equity for a renovation property. He then paid some of the cash back immediately so he could draw down the funds as and when it was convenient to him. His wife was due to give birth in five months time and he planned to make some lump sum payments so he could take a payment holiday during his extended paternity leave.
In conclusion, offset tracker mortgages offer the benefits of interest rates that closely follow the Bank of England’s base lending rate, while offsetting the borrower’s savings against the mortgage debt. Offset tracker mortgages are gaining in popularity as more people realise the benefits it can offer them.
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Source by Joe Foster