Offset Loans More Effective Than Savings
Since the Bank of England reduced the base rate of interest on loans and savings to the historically low level of0.5 per cent back in March 2009, many individuals who have savings in a deposit account have struggled to obtain any sort of good interest rate on their money.
This has encouraged many savers to withdraw their funds from their savings in order to find a better return elsewhere, or to use the money to repay expensive loan and card debts.
But new research from the lender First Direct, has found that money which has been placed in an offset loan or mortgage account, has been more financially effective for saves, than leaving their money in a traditional deposit account.
Although savers with an offset home owner loan do not receive interest on their savings, the money is used to reduce the interest which is paid on the loan, thereby reducing the loan balance much quicker, or lowering the monthly loan repayment amount.
The research estimate that around 460,000 people with an offset loan made an effective return on their savings of £1.9 billion, compared with just £534 million which they would have made through traditional savings account.
Richard Tolchard of First Direct said “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 seeing the value of their savings eaten up by inflation, as well as paying tax on the interest earned, no tax applies if they use the funds to reduce their loan balance.”
“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.”
