Following last week's base rate decrease, competitive savings rates are becoming a distant memory. This will leave consumers desperately scrabbling around for an alternative place to keep their nest egg in a last ditched attempt to earn a return.
Offsetting savings against a mortgage appears to be a good alternative and despite popular belief, it's very simple, doesn't require a huge savings pot, is completely tax free and does exactly what it says on the tin. Unfortunately, some consumers may lose out due to lack of understanding as 1.6 million do not even know what it is and almost one million think it's too complicated.
Unlike overpaying a mortgage, offsetting allows consumers to access the money at any time whilst protecting the nest egg from the tax man
As savings rates head for 0%, new research from uSwitch.com reveals that almost 1.9 million consumers would look to offset savings against their mortgage in a bid to secure a decent return. The research shows that consumers offsetting almost £3,000 of savings against a £150,000 mortgage and making a £200 deposit into the account every month will save almost £40,000 mortgage interest along with a seven year reduction in the term - all completely tax free. With the average variable rate savings account paying around 1.26% AER and the average two year tracker at 3.93% APR, the majority of consumers would be quid's in by offsetting.
In just 12 months, £221 could be saved in mortgage interest by offsetting the average amount of savings. In fact, with 5% of mortgage deals currently offering consumers an offset facility, if all consumers eligible for this benefit actually used it they would save a total of £130 million in interest in just one year. In three years, this saving totals a staggering £630 million.
It seems so easy - what's stopping people doing it?
six point seven million consumers wouldn't consider offsetting but 1.6 million of these do not even know what it is. Almost one million think it's just too complicated and 2.7 million people don't think it will save them money. Further confusion lies amongst 1.4 million consumers as they wrongly believe they will not be able to access the money.
Example: The average variable rate savings account currently pays just 1.26% APR. On the average savings pot of £2,813 consumers would earn just under £36 in interest in one year. If savers also add an additional £200 per month to this amount for 12 months, at the end of year one they will have a total savings pot of £5,213. In the average variable rate savings account at 1.26% AER, this would earn a total of £52 in interest. By offsetting this money against a mortgage for one year, £221.17 would be saved in interest which is four times the amount that would be earned in a savings account.
Offsetting has exactly the same impact on the mortgage as overpaying. The main difference is that the money is always accessible as it sits in a savings account alongside the mortgage - when consumers overpay they cannot get the money back. In such an unstable financial climate, this could be the preferred option for many homeowners. Unlike a standard savings vehicle, any money which is offset against a mortgage is also completely safe from the tax man.
People with trackers mortgages could be feeling particularly flush at the moment as the majority of these three million consumers will have seen their mortgage rates drop by 4.5% in the last six months from the average rate of 5.82% to 1.32%. Already, these homeowners have saved £363 on their monthly mortgage re-payments which, if they don't need the money for day to day living costs, could be used to overpay or offset against their mortgage interest.
Louise Bond, personal finance product manager at uSwitch.com comments: "Unlike overpaying, offsetting allows consumers to access their savings at any time. For people that are nervous about the current financial situation, this could offer the most lucrative and safest alternative to a low rate savings accounts. Unfortunately, only 5% of mortgage deals currently allow consumers to offset but this is something that would change if the demand for offsetting increased. As consumer knowledge of offsetting is so low, it's a bit of a catch twenty two situation.
"Despite popular belief, you do not have to have a high savings balance to benefit from offsetting. As long as you have a mortgage rate that is higher than your savings rate after tax, you will be quids in by offsetting for a little as one year. In addition, you have the added security of being able to access the savings at any time unlike making overpayments."
