There is no doubt about it; the last few years have been some of the most challenging for prospective mortgage borrowers, notably first-time buyers and owner-occupiers.
This might be surprising when put into the context of interest-rate stability, particularly at such historically low levels. July 2007 was when the Bank of England last increased the base interest rate – to 5.75 per cent, which was paltry compared to the levels seen at the end of 1989 when rates peaked at 14.875 per cent. Yes, I did have a mortgage then too. But if you had predicted in 2007 that there would be no Bank of England rate rise for seven years or so at least, no one would have believed you.
There are some 1.6m people who have bought their first homes since the last rate rise, and who may be understandably anxious. Couple this with the fact that we have a record number of families with at least one member who has become self-employed, either by choice or necessity, and approximately 4.6m people who work for themselves in the UK, according to the Office of National Statistics. Self-employment figures are at their highest for four decades – 15 per cent of the UK’s workforce.
Offset mortgages can offer distinct advantages for both the employed and self-employed. Let us start with the latter. Newly self-employed professionals quickly discover that certain aspects of their financial lives become more complicated. Getting a mortgage, for instance, is a lot less straightforward, with fewer lenders readily able to accept the new reality of today’s earning patterns. Offset mortgages, however, are ideally suited to those who are self-employed. They are different to traditional mortgage arrangements, but these differences bring distinct advantages to those who have to put aside money to pay tax bills on a regular basis as well as those who hold savings that they would like to put to better use. For the self-employed the benefits are twofold. They can pay back the mortgage in less time using the money that has to be put aside for their tax bill.
An offset mortgage can allow the interest savings to be used in two different ways. The first is that the amount of interest paid is reduced but the monthly payments stay the same, so the borrower is effectively overpaying each month. The result is that the borrower pays the mortgage back quicker – perhaps in 23 years as opposed to 25 years (depending on the level of offsetting). The second is that the monthly payments can be calculated to pass on the interest saved by the money in the offset account, giving lower monthly payments. Not all lenders offer both options though, and most seem to offer only the first.
The offset mortgage does not discriminate between the employed and self-employed. Both are just as likely to be eligible for an offset mortgage as for a traditional mortgage. Lending criteria may not differ for an offset mortgage compared to a traditional mortgage, and certainly that is true in the case of our sister society, National Counties. The lender will still assess affordability on the whole mortgage amount rather than adjusting for any offset and assessing on that basis.