Offset Mortgages

How Taxpayers Can Save With Offset Mortgages

Offset mortgages have been around for some time, and are well known for their money-saving and flexible properties - this is why people opt for them. But did you know that as well as saving money, offset mortgages also help you avoid tax? It might be unbelievable but it's true - offset works like no other savings vehicle and can work round the UK tax laws, making it the holy grail for investors. But how does it do this? Do you need an accounting degree to be able to make offset tax-free? And how much are you actually avoiding by investing your money into offset?

Current account offset mortgages work like this: mortgage holders consolidate all their accounts - savings, current account, loans, mortgage and sometimes credit cards - with one provider. Instead of accruing interest on credit balances in current accounts, with offset mortgages these balances are offset against the amount of outstanding debt. With some offset mortgages, savings accounts are offset against mortgage payments too, so a lump sum is held up against the debt, reducing the rate owed on the mortgage.

All taxpayers with offset mortgages can benefit from using their savings in this way - because essentially with offset you are not earning any interest on savings, because it is being used to reduce our debt instead. So now interest means no taxation on that interest. So any money you save as a result of investing in offset mortgages is tax-free.

The Right Mortgage For You ImageThe mortgage illustrations usually include an 'equivalent savings rate'. This is based on the fact that people who link their savings to their offset mortgages are effectively getting a higher rate of interest on their savings through tax avoidance. Although they don't get this interest on their savings account per se, they do reduce the amount of interest they pay on their mortgage account.

Most of the information about offset mortgages includes illustrations of the equivalent savings rate. Higher rate taxpayers, who are charged at 40%, save more than standard rate taxpayers, who pay 22% tax on interest paid on their savings. The illustrations vary widely in the amount they say taxpayers will gain, but what is certain is that taxpayers will save the tax they would have paid on their savings. And taxpayers who have both ISAs and offset mortgages can still benefit from tax-free savings in the ISA.

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In addition to the tax savings, offset mortgages can save mortgage holders a great deal of money over time. This is because of their flexible features, which allow offset mortgage holders to customise their repayments to suit their finances. This would particularly suit the self-employed or other people with fluctuating income levels. And since most self-employed people put money aside for their tax bill, these savings can also be used to cut the payments they make on their offset mortgages.

Offset mortgage accounts offer great flexibility for UK consumers. In the past, this increased flexibility of offset mortgages has been balanced by a slightly higher interest rate. Many offset deals offer variable rate tracker mortgages pegged above the Bank of England's base rate. However, rates are changing all the time and some offset mortgage providers offer rates that compare very well with the rates on standard mortgages. With the flexible features and potential tax savings, all taxpayers should certainly consider offset mortgages.

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