Homeowners: Maximise your savings

Mortgage borrowers with savings can cut thousands off their payments. Christina Jordan rounds up the best fully flexible and offset mortgages.

Flexible mortgages and offset deals are absolutely fabulous. The reason they are so great is that they allow borrowers to take back control of their mortgage and repay it in the way they want to, when they want to -- not according to a strict payment plan imposed by the lender.

Of course, there are some boundaries with offsets -- you have to make sure you are on track to repay your mortgage at the end of your agreed term after all -- but within those boundaries you are free to pay more, pay less, even borrow money back from your mortgage account should you need it.

How does it work?

Fully flexible and offset mortgages share similar benefits:

• They calculate interest daily or monthly -- not annually
• They allow you to overpay -- preferably unlimited overpayments
• They allow you to underpay or take payment holidays (usually within set parameters)
• Some allow you to borrow back money.

On top of this, offsets also allow you to offset your savings and sometimes your current account against your mortgage debt. By doing this you are effectively overpaying the money you have in credit against your mortgage.

This reduces the amount you owe and you are accordingly charged less interest. And because you are charged less interest more of your monthly payment can chip away at the capital debt, reducing it even more. This virtuous circle has a dramatic cumulative effect, saving you up to thousands in unpaid interest charges and potentially years off your mortgage term.

Even better, by offsetting your savings and not receiving interest on them (instead saving interest on your mortgage debt), you do not have to pay 20% tax on your savings interest, or 40% for higher rate taxpayers.

Any downsides?

Firstly, in the current climate a few people on existing very low rate mortgages might be better off staying put if their current mortgage rate is lower than the best savings rate they can get. This is an unusual and temporary situation caused by super-low interest rates combined with the need for banks to attract retail funds. Ordinarily mortgage rates are higher than savings rates, which is why offsets almost always make good financial sense.

Secondly, offsets are often described as being best suited to remortgagors with a large savings pot to offset, or for higher rate taxpayers.

But while these groups will certainly benefit greatly from offsets, they are still completely suitable for first-time buyers or those without enormous savings to offset. Indeed, just offsetting a small amount can still have a large long-term impact on your debt.

Finally, offsets and flexible mortgages have traditionally been priced a little higher than standard mortgages. In exchange for controlling your own mortgage and being able to manage your debt your way, borrowers used to have to pay a premium on rate.

But is it still the case?

The rate test

It's worth pointing out first that flexible deals have changed massively in the last 10 years. There used to be a handful of flexible mortgages and standard deals offered no flexibility at all.

Now virtually all mainstream mortgage lenders offer flexibility in their standard range with most enabling you to overpay up to 10% a year, penalty-free. Many will also consider underpayments and payment holidays if you are ahead with your repayments and almost all calculate interest at least monthly.

If you want total flexibility some dedicated fully flexible mortgages remain (such as Yorkshire Bank's Flexible Payment Mortgage) but they are few and far between and you might find that the flexible features you want are freely available across the market.

The same is slowly happening with offsets, with some lenders offering an offset option on a range of their standard products. But offsets are still generally kept separate to mainstream products, so can be easily compared.

The cheapest offsets I could find were three term trackers -- First Direct's at 2.79% up to 60% LTV, Woolwich's at 2.97% up to 70% LTV, and First Direct's again at 3.14 up to 75% LTV.

Pretty darn good deals, and comparing like for like -- term trackers -- the best rates available across the market!

The absolute lowest rates in the whole wider market are not offsets, and come from Woolwich (a 1.98% one-year tracker up to 60%) and HSBC (1.99% two-year discount deal up to 60%, and 2.49% up to 75%). Yes, these are cheap but they are very short-term deals.

There are far more trackers than fixed rates in the offset market and in this variable sector they are certainly among the best deals in the whole market. There is a wide range of sub-4% offset deals available up to 80% LTV, but unfortunately for those with less than a 20% deposit, the options peter out.

In the fixed rate arena, offsets are few and far between, although the best two-year fixed rate on the market is also an offset -- First Direct's two-year fix at 3.49% up to 60% LTV. The lender also has a cracking deal up to 75% and Scottish Widows Bank isn't far behind (see table below). So while there may not be a wide choice of fixed rate offsets those available are very competitive indeed. Again, small deposit borrowers will sadly find little available.

Verdict: There is certainly no compromise on rate if you find the right offset product --quite the opposite. Some of the best deals on the market are offsets, meaning you can have your cake and eat it with these flexible and innovative mortgage products.

Below are some of the best offsets in the market, whether you want to fix your rate or go for a variable deal.

Variable-rate offsets

Fixed-rate offsets

Compare offset mortgages with lovemoney.com