first direct has calculated that it takes the average mortgage borrower almost 12 years to reach their 'Mortgage Mercy Day' - the theoretical moment when if all of the interest payments on a repayment mortgage were accumulated and paid off first, borrowers would start to pay off the loan.
However, the bank says that switching to an offset or Å’savings mortgage1 would bring this forward by two years and four months for someone with an average savings and current account balance. And switching to the first direct offset could bring this date forward five years and two months.
Offsets work by linking the mortgage to savings and current accounts, in order to offset the loan against the value of credit balances. It means that borrowers pay less interest so, for a mortgage of £100,000 and savings of £20,000, interest is payable only on £80,000 of borrowing.
first direct calculates that at an average standard variable rate of 5.89 per cent, the moment of Mortgage Mercy would be reached 11 years, nine months and five days into a £100,000, 25-year capital repayment mortgage.
By switching to an offset with the same SVR of 5.89 per cent, a homeowner with the national average savings of £5,159 and the typical current account balance of £1,000 could bring the day forward 851 days (or two years, four months). And by switching to a first direct offset mortgage, with an average SVR since July 2001 of 4.99 per cent, Å’Mortgage Mercy DayÅ’ could be brought forward by as much as 1,885 days (or five years, two months).
Meanwhile, a typical couple with separate bank and savings accounts, but holding a joint mortgage, could begin to pay down their capital as much as six years and four months earlier by linking all of their accounts with the first direct home loan.
The greater the credit balances held in accounts linked to the mortgage, the greater the monthly saving or the sooner the Mortgage Mercy Day is reached. For example, savings of £25,000 bring forward the date by seven years.
Richard Kimber, first direct1s chief executive said: "Mortgage Mercy Day helps to illustrate just how much interest borrowers pay their lenders and how an offset mortgage can go a long way towards reducing monthly payments or helping to pay the mortgage off years earlier.
"The arrival of your Mortgage Mercy Day - when you begin to pay for your home, not your loan - is a good psychological boost."
The first direct variable offset mortgage:
4.75 per cent (or base rate) until 1 January 2006, then one of the lowest standard rates available - 5.75 per cent; Or fix at 5.25 per cent for three years; Offset - savings and current account balances reduce the mortgage, so all credit balances effectively earn the mortgage rate; Simple - all accounts are managed separately. Flexible - as long as the interest is paid each month and the loan is repaid before the age of 65, everything else is up to the customer, so monthly capital repayments can be any amount and can be changed at any time.