Offsetting Savings Against Your Mortgage Could be an Alternative Solution to Falling Savings Rates
CHESTER, England, November 6, 2012 /PRNewswire/ --
- Borrowers can reduce mortgage interest, mortgage term and tax liabilities by offsetting their savings against their mortgage
With interest rates on the top paying savings accounts falling considerably over the past few months, many savers will be looking at viable alternatives to make their savings work harder for them. For savers with a mortgage, one possible option is using an offset, which can not only reduce the amount of mortgage interest and the term of the loan, but can also help reduce tax liabilities, according to MoneySupermarket.com.
An offset mortgage allows borrowers to link their savings to their mortgage balance. Instead of earning interest on savings, the money is set against the outstanding mortgage, with interest only accruing on the remaining balance. As a result, less interest is paid on the mortgage debt, and the mortgage can be paid off earlier. For example, someone with a £150,000 mortgage and £30,000 in savings would only be charged mortgage interest on £120,000. However, in many cases the mortgage repayments would be based on the full £150,000 loan meaning they overpay each month.
For example, assuming a £150,000 capital repayment mortgage at a rate of 3.00 per cent borrowed over 25 years, someone with £30,000 in savings would save themselves £10,039 in interest and repay their mortgage three years early. In addition, a basic rate tax payer could save £3,653.32 in income tax, and a 40 per cent taxpayer would save £7,306.63 in income tax that they would have to pay if their money was in a standard savings account paying 2.00 per cent AER.
A basic rate taxpayer would need to earn the equivalent of 3.75 per cent or more on a standard savings account in order to generate an equivalent return to the benefit offsetting would have, however there are currently no accounts that beat this. A 40 per cent taxpayer would need a savings account paying 5.00 per cent or more, while someone in the 50 per cent band would need to be earning at least 6.00 per cent.
Clare Francis, mortgage expert at MoneySupermarket said: "The advantages of an offset mortgage are evident to see for people who have decent savings pots but who are struggling to find a real return for those savings. In addition, offsetting can also save you tax - usually, you pay income tax on interest you earn on your savings. However, because you don't earn any interest if the money is offset against your mortgage, there is no tax to pay, making this a particularly attractive option for higher and top rate taxpayers.
"Of course, you could have a standard mortgage and use your savings to pay a chunk of it off, but if you do this it is difficult to get at that money again if you ever need it. With an offset, you can access your savings at any time. In addition, most mortgage products restrict the amount you can pay off each year - it is usually capped at 10 per cent of the outstanding balance. Offsets have no such restrictions.
"Offsetting can be a great way of getting more from your savings and paying less tax. However, it won't be the right thing for everyone. Much will depend on the 'premium' you have to pay to offset and the amount of interest you could earn on your savings. If you are looking for a new mortgage, it's worth investigating whether an offset could be right for you rather than just sticking with standard mortgage and savings accounts, particularly at the moment with savings rates so low."
Notes to Editors
Max Arr/Bkg Lender Pay Rate Rate Type Period LTV Fee ERC Chelsea BS 2.54% Fixed 2 Years 70% GBP1,895 2 Years Yorkshire BS 2.59% Fixed 31-Dec-14 60% GBP1,295 31-Dec-14 Beverley BS 2.75% Discount 3 Years 75% GBP995 3 Years Yorkshire BS 2.79% Tracker 31-Dec-14 75% GBP995 31-Dec-14 First Direct 2.89% Fixed 2 Years 65% GBP999 2 Years
Source: http://www.MoneySupermarket.com 5.11.12
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