If you’re searching for a way to reduce the amount of interest you pay on your mortgage, an offset mortgage could provide a flexible solution. Read on to discover whether it could be the right option for you.
An offset mortgage allows you to link your savings to your mortgage. The money held in one or more linked savings accounts will be offset against the amount you owe on the mortgage. So, you could benefit from lower interest repayments or pay off your mortgage sooner.
You’ll usually still be able to access the money in your savings account when you choose, so you have the advantage of flexibility too. However, your savings won’t typically earn any interest, so you’ll need to weigh up the potential loss against how much you’ll save by using an offset mortgage.
While offset mortgages could be useful, they’re not common. According to FTAdviser, only around 7% of all mortgages in the UK are offset mortgages.
3 circumstances where an offset mortgage could be valuable
1. You have a large amount of savings
The more you can place in a savings account linked to an offset mortgage, the more you benefit.
If you have a large amount in a savings account, it could present an opportunity to cut your mortgage costs. It’s worth reviewing how much interest your savings are currently earning. In many cases, you’ll be paying a higher rate of interest on your mortgage. So, while you wouldn’t usually earn any interest when your money is in an offset savings account, you could benefit in the long run.
An offset savings account could also be valuable if you’ve received a lump sum, such as an inheritance or life insurance payout, but aren’t sure how to use it yet.
Assuming you stay within the limits of the Financial Services Compensation Scheme, which is £85,000 for each person, per bank or building society, your money will be protected.
As a result, it could provide a safe place for your lump sum that will directly benefit you by reducing mortgage repayments without you having to make large financial decisions.
2. You’re self-employed
An offset mortgage may work well if you’re self-employed for two key reasons.
First, you may set aside money to pay your tax bill at the end of the tax year. You could use this money to offset your mortgage costs while still having ready access to pay your taxes. It might be a useful way to make your money work harder.
Second, if your income is irregular, the flexibility of an offset mortgage might be valuable to you.
You may not feel comfortable making overpayments in case your income falls or you need to cover an unexpected shock. An offset mortgage could allow you to pay off your debt quicker while still giving you access to the savings in an emergency.
3. You’re a higher- or additional-rate taxpayer
You’re not taxed on the money held in an offset savings account as it’s not earning interest. So, if you may pay tax if your cash was held in a traditional savings account, transferring it could reduce your tax bill while benefiting you financially.
The interest you earn on your savings could be liable for Income Tax if it exceeds the Personal Savings Allowance (PSA). Basic-rate taxpayers have a PSA of £1,000. However, if you’re a higher-rate taxpayer it falls to £500, and if you’re an additional-rate taxpayer you don’t have a PSA.
An offset mortgage could give you a way to make your money work hard and benefit your long-term plans without increasing your tax liability. In fact, as interest rates on mortgages are often higher than savings accounts, an offset savings account could deliver even more benefits than the traditional alternative.
Contact us if you’d like to learn more about offset mortgages
There are other circumstances where an offset mortgage could be a useful way to cut the amount of interest you’re paying and provide flexibility.
If you’d like to understand if an offset mortgage could be right for you, please get in touch. We can assess your mortgage needs and provide guidance about which type of mortgage suits you, and provide support throughout the application process.
Please contact us to arrange a meeting.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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