THE Bank of England's decision to leave interest rates on hold this week came as no surprise, but the longer rates are depressed, the more elusive a return on savings becomes.
The recent withdrawal by National Savings & Investments of two of its most popular products, as well as a reduction in its other rates, has reduced savers' options.
One consequence is that offset mortgages are becoming increasingly attractive for anyone who has both savings and a home loan. The policies, where savings can be used to reduce borrowers' mortgage interest costs, have become more and more mainstream since they were launched 10 years ago.
Offset deals enable home buyers to effectively earn the mortgage rate of interest on their savings. They work by combining a mortgage with one or more savings accounts and, in some cases, a current account. The borrower is then required to pay interest only on the net balance of the mortgage after the amounts in the linked savings and current accounts have been considered.
In other words, if the mortgage is pound(s)100,000 and there are savings of pound(s)10,000 available which are offset against it, interest is only payable on pound(s)90,000 of the loan. Rather than making lower interest payments, however, many people with this type of mortgage prefer to continue making repayments on the full loan so it is paid off faster.
Ray Boulger, senior technical manager at independent mortgage brokers John Charcol, says: "The key attraction of an offset mortgage is its tax efficiency. Interest received on savings would normally be subject to income but because no interest is actually received via the offset arrangement, it is very tax efficient, particularly for higher rate taxpayers. The tax treatment means that any savings in an offset account effectively produce a return at the mortgage rate grossed up at the borrower's relevant marginal tax rate."
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