New home loan feeds off existing balances

A new style of home loan called an offset mortgage could save homeowners billions in interest, slash years off their repayment terms and revolutionise the Irish mortgage market, claims National Irish Bank (NIB) - the first lender to offer the product here.

The offset mortgage works by automatically crediting any money borrowers have resting in NIB current or savings accounts against their outstanding mortgage balance.

The result is that homeowners are charged a lower amount of interest on their debt, while effectively being paid tax-free interest on their savings at home loan rates rather than the tiny fractions offered on many deposits.

So far, so much financial sense. But do NIB's claims stack up?

First of all, this style of mortgage is not completely new, as a very similar product known as a current account mortgage has been on offer from First Active for the past two years.

NIB says that its product goes further, allowing customers to credit as many as six current accounts and six savings accounts against the loan.

This could prove attractive to joint borrowers who don't like the idea of joint current accounts.

First Active does not provide a chequebook. On the other hand, NIB offers a full range of account services, including online banking.

But the NIB loan's main advantage is that it has lower interest rates and is generally competitive. This is important because if customers are paying over the odds, it could cancel out any savings they make through the "offset". Both mortgages will produce the best results for people with high credit balances.

It will also help if they arrange to pay direct debits near the end of their pay period, so that a greater chunk of their salary can be offset against the debt for longer.

According to NIB, a homeowner with a balance of €150,000 and 20 years left to run on a loan with a rate of 2.99 per cent could save almost €28,500 and shorten the term by two years and 10 months by switching to its offset mortgage, despite the fact that a €150,000 loan would attract a higher interest rate.

NIB bases these figures on customers with a total of €11,000 in their credit accounts. "Offsetting" will bring greater savings than if they simply made a lump sum overpayment of €11,000. It will also be more flexible, allowing them to spend their nest egg at a later date without having to take out an equity release loan.

If the person has a more modest €1,000 saved, the total interest repayments still fall by €24,860.

NIB also assumes the customer has a monthly income of €2,800 and spends €1,360 of it evenly over the month.

But what if homeowners are spending every cent they earn each month? If their expenses total €1,900 - not including the normal mortgage repayment - then they will save just €3,725 in interest repayments and shorten the term by a barely noticeable four months.

Young first-time buyers looking to borrow as much as they can might have more joy at First Active, however.

This is because the NIB mortgage is only available over terms of up to 25 years, but younger borrowers can spread their repayments over a 40-year term at First Active, thus boosting the amount of cash they can borrow.

In many ways, the marketing hype is not misplaced. Both products have the potential to change the way homeowners manage their finances.

But, as always, it will help if you only spend a small proportion of what you earn, and if you earn a lot in the first place.