Offset mortgages are not new and have been in the market for several years.
They do not work for everyone but are great for those who have savings.
What is an Offset Mortgage?
- The money you owe on your mortgage is linked to a separate savings account.
- You will only pay interest on your mortgage balance minus the balance of your linked savings account.
- You do not use your savings to repay any of your mortgage, they just sit alongside it.
- This reduces the term of your mortgage or your monthly payment.
Do they work for anyone?
No, they work for people with money on deposit.
In simple terms, this could be savings, or regular deposits from surplus income, where you want your money to be used in a tax efficient way.
Why should I consider an Offset Mortgage?
When you want to:
- Reduce the term of your mortgage or your monthly repayment without making an overpayment.
- Reduce the amount of mortgage interest paid.
If you are paying tax on your savings. They work particularly well for higher rate and additional rate taxpayers.
- Higher rate taxpayers’ only have a personal savings allowance (PSA) of £500 before the must declare and pay tax on the interest earned.
- Additional rate taxpayers’ have no tax-free interest allowance under the PSA and will pay tax on all tax bearing savings accounts.
There is no tax to pay on the offset savings account used for the Offset mortgage.
Do they work for self-employed and limited company directors?
Yes, the self-employed can leverage their business to reduce the mortgage term on their personal mortgage.
Examples of how a client may use money / savings in an Offset savings account:
- Savings set aside to pay their personal tax bill
- Money allocated for quarterly VAT bill
- A seasonal business with have high levels of surplus cash
- Limited company directors could hold their dividends in an offset savings account
Note to qualify, the offset savings account must be in personal account and not in a company name.
Do they work for landlords?
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Yes, landlords can help reduce their own personal mortgage interest by holding surplus rental income in their offset savings account which is linked to their own residential mortgage.
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Note to qualify, the offset savings account must be in personal account and not in a company name.
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How do offset mortgages work?
Example:
Mortgage of
Mortgage interest rate of
Savings account
Impact of Offsett
Interest payable on balance of
£200,000
2.5%
£20,000
£200,000 (Mortgage) minus £20,000 (Savings)
£180,000
Due to offsetting your £20,000 savings, you would now pay only interest on £180,000 of your mortgage.
You receive no interest on the savings of £20,000, consequently there is no tax liability for interest received. An instant access savings account currently would be paying circa. 0.5%.
When do Offset Mortgages work best?
Offset mortgages work best when one of the following applies:
- You have a level of savings producing interest which attracts a tax liability.
- Mortgage interest rates are higher than the rate of interest received on savings, the bigger the difference the greater the impact.
- You have savings but do not want to commit these to overpaying your mortgage.
Mortgage interest rates
Despite a common misconception, even though you have the benefit of using an offset mortgage you can still obtain a fixed interest rate mortgage.
What are the advantages of an Offset mortgage?
- Reduce your monthly payments
- Shorten the term of your mortgage
- Get you mortgage free sooner
- Pay less interest
- You always have access to your savings
- You can still pay more into your savings
- Pay no tax on the savings held in the offset savings account
What are the disadvantages of an Offset mortgage?
- You need savings, although even small savings can have an impact
- You do not receive interest on your savings
- Your savings will not grow from interest earned.
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