How offset mortgages can help to reduce monthly payments

Posted on 21 September 2015 by Nick Morrey

2 comment(s)


How offset mortgages can help to reduce monthly payments

The plight of savers facing poor returns on their money is well documented in a record low base rate environment. 

But how can their mortgage help boost their returns? Mortgage rates are also at an all time low but they are still typically higher than savings rates. Some borrowers with an offset mortgage can combine the two and make their savings work considerably harder.

Here is how an offset mortgage works. If you have substantial savings and an offset mortgage you can take those savings from your deposit account and put them into the savings account linked to your mortgage. 

It’s important to stress that the linked savings account does not accrue any interest, but every day the balance is subtracted from your mortgage debt. If you’re relying on your savings for income, an offset mortgage may not be right for you.

The remaining debt is charged at mortgage rates, which are higher than nearly all savings rates. 
So your savings are now effectively working harder to save you money on a rate higher than your deposit account because the presence of the savings cash is reducing the amount of mortgage debt on which you’re paying interest.

The benefits do not necessarily end there. If you are a higher rate tax payer then your savings rate is taxed at that higher rate but the offset accrues no tax liability at all. 

Example:

If you have a mortgage of £100,000 with a rate of 4% then the monthly interest payment (on interest only) would be £333 per month.  If you also had separate savings of £20,000 but used them to offset the mortgage via a linked savings account then the lender would only charge interest on £80,000 – the net balance between mortgage and savings. Then the mortgage payment would be £266.  The saving is £66 per month, or £792 per year.

If you leave the savings in the normal savings account and received 2% interest then the net interest you would receive annually would be £320 (net of 20% tax).  If you are a higher rate tax payer you would have to pay additional tax on that interest. 

The annual saving on the mortgage of £792 per year is greater than the loss of £320 per year interest on the savings (more of a saving for higher rate taxpayers).

If you’re interested in finding out more, please don’t hesitate to contact John Charcol to see if your monthly repayments could be channelled through an offset mortgage.

This article is for information only and does not constitute advice. Please obtain professional advice before taking out a mortgage. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

All information is correct at the time of publication.

Comments

Hi Geoff

Thank you for your enquiry. Due to the personal nature of your situation and the relative complexities associated with off-set mortgages I will respond to you directly if that is acceptable to you?

Kind Regards

Nick

Nick30/09/2015 10:43

re- offset mortgage I have approx 35k left over 5yrs I could match that amount as an offset. what I am aiming for is to pay off my mortgage as quickly as possible- is this the way to do it- I still want my savings available so I don't want to pay off mortgage whilst I am still earning- I look forward to you advise.

geoff30/09/2015 06:38

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