Offset Mortgage
HOW AN OFFSET MORTGAGE CAN MAKE YOU MONEY:NON-OFFSET MORTGAGE WITH SEPARATE SAVINGS: Lets say you currently have a non-offset 'traditional' mortgage of £100,000 and savings, held completely separately, of £25,000. You want to retain access to your savings. Your mortgage interest rate is, say; 5% and for ease of explanation, we'll assume your mortgage is on an 'interest-only' basis. Your mortgage payment would therefore be £417 a month. Say your £25,000 'traditional' savings account is earning the same 5% gross interest as your mortgage rate, giving you a gross return of £1,250 a year. Assuming you are a taxpayer, you'll have to pay tax on the interest. If you pay basic-rate tax, 20% tax will be deducted from the £1,250 leaving you with £1,000. If you are a higher-rate taxpayer you will have an additional £250 tax to pay, as there is an extra 20% tax liability - based on the £1,250 interest, leaving you with £750. You have lost £500 in tax. OFFSET MORTGAGE: Instead of the above 'traditional' arrangements, you have an offset mortgage. You have the same outstanding mortgage of £100,000 and £25,000 in savings, to which you still want to retain access. As above, your interest-only mortgage payments are £417 a month. However, you now place your £25,000 savings in an account linked to the offset mortgage. You will now only pay mortgage interest on the difference between your mortgage balance and your savings balance. This means you will only pay interest of £313 a month, saving you £104 a month in interest, worth £1,250 a year in saved mortgage interest. As you have simply saved mortgage interest, rather than being paid deposit interest, there is no tax whatsoever to pay on this return. The saving to a basic-rate taxpayer is £250 and to a higher-rate taxpayer £500 a year. |
Not all offset mortgage providers allow you to reduce your monthly mortgage payment, however, the 'return' to you is the same, except that the 'saved mortgage interest' is used to reduce your mortgage.
This is an effective overpayment, with the result that your mortgage will end earlier than normal.
GET A TAX-FREE RETURN ON YOUR SAVINGS: An offset mortgage is especially valuable to a higher-rate taxpayer, as there is no tax to pay on the return on your savings. This is because the savings account receives no interest. Your return is, instead, by way of a reduction in your mortgage balance. You therefore get a tax free return on your savings equal to your payable mortgage rate. |
