Mortgage News Time To Offset Your Mortgage
25 May 2010 / by Rachel Mason
With savings rates so low, mortgage holders with savings are being urged to think about the benefits of offsetting.
Independent financial research company Defaqto claims that the combination of “flexibility, tax advantages and low interest rates” means that now could be the time for mortgage holders, particularly higher rate taxpayers, to consider an offset mortgage.
“Offset mortgages can work well for higher rate taxpayers who have a mortgage and a reasonable level of savings,” said David Black, Banking Specialist at Defaqto.
“Offset mortgages effectively offer tax free interest on savings at the same rate as the mortgage. The savings interest is offset against the mortgage interest payable rather than actually being received.”
Defaqto has calculated that with a savings pot of £20,000 and a average rate offset mortgage of 4.25 per cent, a saver would knock £850 off the annual mortgage interest (on a mortgage higher than £20,000), but to earn that amount on a taxable savings account, a higher rate taxpayer would need to find one paying a gross interest rate of 7.08 per cent.
Nick Scarrett, head of pensions and investments at Fair Investment Company says that when you have debt, i.e. a mortgage, and you also have savings, it only makes sense to keep those savings where they are when you are getting a good rate of interest on them.
“At the moment, many people will be paying more interest on their mortgage than they are earning on their savings, and this doesn’t make financial sense,” says Nick.
“In these situations, it is worth paying off your debts if you can – monthly overpayments or a one off lump sum overpayments on your mortgage can really cut down your loan and/or the duration of your loan. But if you are not happy using all your savings to pay off your mortgage, it is worth considering offsetting.
“Offset mortgages link the balance of your mortgage to money held in savings, which allows you to ‘offset’ the credit balances in your current and savings accounts against the mortgage balance, so that interest is only paid on the difference.”
Mr Scarrett says that those without mortgages, or with little left to pay are certainly better off utilizing their ISA allowance, as he says ISAs remain the most tax efficient way to save, but saying that “people with a mortgage and savings could get more from their money by offsetting.”
© Fair Investment Company Ltd