SSIA mortgage offset urged

Special Savings Incentive Account (SSIA) holders should use their lump sums to reduce the cost of their mortgage and pay it off faster, according to First Active.

The lender says mortgage holders can "extract the maximum value from their money" by taking out its Offset Flexible mortgage, introduced last week.

An offset mortgage is a new style of home loan that works by crediting any money which borrowers have in their current or savings accounts against their outstanding mortgage balance.

The result is that homeowners are charged a lower amount of interest on their debt, which is calculated daily. They also effectively benefit from tax-free interest on their savings.

Offset mortgages are currently seen as a niche product but as people with high credit balances benefit the most from them, First Active reckons its product might appeal to the 1.1 million SSIA holders who haven't yet decided what to do with their cash.

Even savings resting temporarily in an account can reduce the interest charges under an offset mortgage. Consumers do not have to make a lump sum overpayment that is difficult to reverse in order to save money.

National Irish Bank (NIB) was the first lender to introduce an offset mortgage here, although First Active previously offered a simpler version known as the current account mortgage.

The main advantage of the NIB offset is that it has lower interest rates. However, First Active offers longer mortgage terms, which might make it more suitable for first-time buyers.

First Active gives the example of a customer with a loan of €250,000 being repaid over 25 years and a balance of €1,000 in their current account. The customer also saves €500 a month in a regular savings account and has an SSIA-sized lump sum of €20,000 in another account.

If such customers continue to operate their accounts in this manner over the life of the loan, they will save almost €90,000 in interest, based on First Active's current interest rate of 4.4 per cent. They will also pay off their loan a staggering 11 years and six months early - all while retaining full, easy access to their savings.

This is much higher than the savings that could be achieved by switching to a low-cost loan such as NIB's LTV mortgage, where rates are as low as 3.75 per cent.

However, the benefits of an offset mortgage will not be quite so dramatic for less disciplined consumers who categorise themselves as spenders rather than savers.