Traditionally, the ability to offset has come at a premium and rates on such deals have tended to be higher than those on the best standard products. They therefore haven't always represented best value for many borrowers. However, First Direct has launched a new deal with a rate of 2.58%. Not only is this the market-leading rate for a lifetime tracker but it's also an offset.
Before we look into the product in detail, it's worth explaining what offsets are.
Offsets work by setting your savings against your borrowings. Your savings, and in many cases your current account, can be linked to your mortgage and instead of earning interest on your savings you reduce the interest you pay on your debts.
If you had a £100,000 mortgage and £30,000 savings you would pay interest on only £70,000 of the loan. However, your monthly payments would be unchanged because they would still be based on the full £100,000. You would therefore be overpaying every month enabling you to clear your mortgage more quickly. Obviously, the more you have in savings, the greater the benefit you'll get from offsetting.
There is also a tax advantage with offset mortgages. Because you are not earning interest on your savings, there is no tax to pay on them. This is a big perk for higher-rate taxpayers.
Not all mortgage lenders offer offsets, but First Direct is one of the major players in this market. We evaluate its latest offering.
What's the deal?
First Direct's new offset is a variable rate mortgage that tracks the Bank of England base rate. The interest rate is 2.08 percentage points above the base rate, meaning the current pay rate is 2.58%. This applies for the life of your mortgage - which is why this type of deal is called a lifetime tracker.
There is a £999 arrangement fee and a deposit of 35% is required. The deal is available for house purchases and to those remortgaging. Existing First Direct mortgage customers also qualify.
It's also worth noting that there is no early redemption charge which means that you can jump onto another deal at any time without being stung by hefty fees.
Any catches?
As with many of the leading mortgage deals a large deposit is required - the fact you need to put at least 35% down will rule it out as an option for many borrowers.
With base rate at a historic low, the next move in interest rates will be upwards. Economists aren't expecting rates to change any time soon but when base rate starts rising again, your mortgage payments will obviously increase. However, because there is no redemption penalty with this deal you could remortgage onto a fixed rate product at any time if you get worried about rising mortgage payments.
In order to benefit from the offset facility you will have to move your savings to a First Direct account (you can also link your current account to the mortgage, although again this will have to be a First Direct account).
Verdict
If a lifetime tracker is the type of mortgage you are looking for and you can stump up the 35% deposit, this is a deal well worth considering.
However, many people find mortgages confusing and don't fully understand how they work. If you are at all unsure about whether this is the right product for you, speak to an independent mortgage adviser as there may be other deals that are more suitable for you.
Top Tip
When comparing mortgage deals, look beyond the headline rate. The set up costs are another crucial factor that need to be considered. The lowest rate won't necessarily be the cheapest option. You may find it works out better value to opt for a mortgage with a slightly higher rate if the arrangement fee is lower - this will all depend on how much you are looking to borrow. You therefore need to calculate the total cost of the loan, including the fees, when comparing mortgages. Speak to a mortgage adviser if you are unsure about how to work this out.
Please note: Any rates or deals mentioned in this article were available at the time of writing.
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