If you usually have a reasonable amount of cash sitting in a savings account earning a low interest rate but have an outstanding mortgage balance, then an Offset mortgage could be right for you! An Offset mortgage links your mortgage account to a savings account and offsets – hence the name- the balance of one against the other. For example, if you have a £300,000 mortgage and generally around £70,000 in savings, you would only pay mortgage interest on the net debt, so £230,000.
So why would you do this? Some people would argue you should just make a lump sum payment of the mortgage and granted, this is an option. The problem is, you would lose access to your savings which you may require either for a future plan or just to provide security. Whatever the reason, an Offset means you retain that access and are able to make use of your savings.
Flexibility is a key benefit to the Offset. As well as being able to withdraw and deposit funds if and when required, it gives you peace of mind that should you need emergency funds relatively fast, you have total access to your savings without any penalty.
Moreover, Offset mortgages can also be utilised as an efficient way of making tax savings. Even with the new introduction of the savings allowance, interest earned on savings accounts with higher balances is still taxed; however, by offsetting you effectively remove all tax implications. In most instances, the interest you are charged on your mortgage will be higher then what you can earn in a normal savings account. Therefore, you will be better off as you would be making a tax-free saving at the higher mortgage rate. In addition, for higher rate taxpayers, it works especially well, as the savings made on the mortgage will not be tax deductible.
Why doesn’t everyone do it then? Well, a slight drawback of an Offset is that the mortgage interest rate can be slightly higher than some mainstream products. Therefore, if you don’t have much savings to put in the offset, it might not be the most cost-effective use of your money. However, for those with a decent sum of money in savings who want to retain access to it, I would suggest optimising an offset facility if you have 20% of more of the mortgage balance in savings.
If you are think an Offset mortgage might be right for you, it is important to contact a broker who can talk you through all your options and ensure you find the best possible deal. Give us a call on 01494 778899, email us at info@pffinancial.co.uk or use the link below to get in touch.
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