Borrowers Still Don’t Understand Offset Loans
Offset mortgages and home owner loans have been available in the UK for many years now and can offer a valuable additional benefit to someone who wants to reduce the balance on their loan, whilst still having access to their savings.
But according to a new survey, conducted by First Direct, somewhere in the region of 40 per cent of people with a home owner loan do not understand how offsetting works and another 35 per cent have only a vague idea on what is involved and the potential savings which are available. The survey also found that just 21 per cent of borrowers actually understood how offsetting works and used it to save themselves money on their loan.
A borrower with an offset home owner loan will also have a savings account running alongside their loan account. Any money within this savings account is used to reduce the balance on the loan account on a daily basis, before interest is added to the loan. As a result of this, the borrowers will not receive interest on their savings (which would be taxable), but will have the interest reduced on their loan.
The money in the savings account remains available at all times for the borrower to draw on. If the borrower maintains the full amount of monthly repayment on their home owner loan, they will effectively be overpaying on the loan and therefore reduce the outstanding balance (and therefore the interest payable). This can have the effect of reducing the loan term by several years in some cases.
Jimmy Kelly of First Direct commented on the lack of understanding amongst borrowers, he said “It is a real worry that consumers are not aware of the benefits of an offset mortgage. Not many people know, for example, that our market leading fee free offset tracker would have the equivalent savings rate of 5.1 per cent for higher earners.”
