Offset Mortgages A Dream For Well Off Homeowners

Offset Mortgages A Dream For Well Off Homeowners

Offset mortgages represent one of​ the​ biggest mortgage innovations seen in​ recent years. Six years ago there was hardly an​ offset mortgage to​ be seen. Now they and the​ current account mortgage,​ to​ which they are closely related,​ account for £10 out of​ every £100 of​ new lending.

What's more,​ one of​ the​ UK 's large lenders believes that 25% of​ existing mortgage holders would be better off with an​ offset mortgage. So if​ you're in​ the​ market for a​ mortgage you​ need to​ know what they're all about. Otherwise you​ could be missing out.

Firstly,​ how does an​ offset mortgage work?

The basic idea is​ that besides borrowing money from the​ mortgage lender,​ you​ also run savings or​ deposit accounts with them. Then you​ are charged interest not simply on​ what you​ have borrowed but on​ what you​ have borrowed less the​ balance in​ your savings and deposit accounts. So,​ if​ you​ had an​ offset mortgage of​ £100,​000 and had £20,​000 in​ their savings account you​ would only be charged interest on​ the​ difference,​ £80,​000. in​ these circumstances,​ no interest is​ paid on​ your savings – the​ interest is​ offset.

It doesn't sound like a​ ground breaking idea – where's the​ benefit?

Quite simple. Whilst the​ full benefit of​ your savings is​ reflected in​ a​ lower interest charge on​ your mortgage account,​ legally you​ have not received any interest. if​ you​ have not received interest you​ can't be charged tax on​ the​ interest. Step away Mr Taxman!

This means that offset mortgages are especially attractive for higher rate taxpayers who would otherwise pay-away 40% of​ the​ interest they receive in​ tax.

Consider some figures. if​ you​ had a​ £100,​000 mortgage paying a​ competitive rate of​ 4.69% plus £20,​000 on​ deposit,​ how would the​ figures work out? Well over a​ typical 25 year mortgage,​ without offset you​ would pay £85,​351 in​ interest but with offset you​ would pay just £41,​998 – that's a​ saving of​ £43,​353. What's more you​ would repay the​ mortgage five years and eight months early. That's because the​ monthly repayments are based on​ the​ full mortgage debt before offsetting is​ taken into account so borrowers are effectively overpaying their debt each month.

And doesn't Mr Taxman look sorry! in​ theory,​ a​ standard tax payer saved £9,​538 in​ tax and a​ higher rate taxpayer a​ whopping £17,​341 in​ tax.

Flexibility can also be a​ major advantage. you​ can typically pay off capital without penalty,​ underpay and take payment holidays so long as​ you've made sufficient overpayments throughout the​ years.

Too good to​ be true – where's the​ catch?

Historically borrowers have had to​ pay a​ higher interest rate for the​ benefit of​ an​ offset mortgage. But the​ good news is​ that with banks and building societies fighting for a​ bigger share of​ the​ offset market,​ offset interest rates are falling.

This means that you​ need to​ look carefully to​ ensure that the​ apparent tax savings you​ could make are not eliminated by the​ slightly higher interest charge. Quite honestly this is​ not an​ easy calculation so it's best left to​ your professional mortgage adviser.

But as​ a​ guide,​ a​ standard taxpayer needs around £20,​000 in​ savings behind a​ £100,​000 mortgage to​ make the​ offset deal better value than a​ traditional mortgage. For a​ higher rate taxpayer the​ savings requirement drops to​ around £10,​000. (These figures are based on​ a​ typical 4.69% fixed offset rate,​ compared with a​ typical 4.49% rate for a​ tracker.) These figures will change as​ interest rates vary and,​ in​ all probability,​ as​ the​ cost differential between an​ offset and a​ traditional mortgage closes.

Not all Offset Mortgages are the​ same!

As you​ would expect,​ with the​ offset lenders fighting for your business lots have added bell and whistles to​ the​ basic concept. Free property valuations and free legal work are relatively common. Then some banks will include your current account in​ the​ offset calculation,​ some lenders enable two nominated savings accounts to​ be offset,​ some will even agree an​ additional borrowing facility with a​ cheque book that can be used at​ any time.

On the​ interest rate front you're bound to​ be offered a​ low starting rate fixed for six or​ twelve months. you​ might also be offered a​ tracker which is​ below the​ Bank of​ England base rate for six months and which only rises above after six months or​ a​ tracker which exactly tracks base rate plus a​ tiny premium for a​ few years. There are lots of​ variations.

The interest rate can also depend on​ what percentage of​ the​ house valuation you​ want to​ borrow. For example,​ one lender is​ currently offering 5.6% if​ you​ are borrowing less than 50% rising to​ 6.45% for up to​ 99%.

Like so many things,​ whilst the​ basic concept is​ simple,​ it​ then gets complicated! This clearly underlines the​ need to​ talk things through with an​ independent mortgage adviser. It's their job to​ ensure you​ get the​ right type of​ mortgage and the​ best deal.

If you​ have savings,​ there's a​ big chance they'll recommend an​ offset mortgage.

*Indicative figures correct as​ at​ November 2018

Michael Challiner has 15 years experience in​ financial services marketing at​ senior level.

Offset Mortgages A Dream For Well Off Homeowners

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