How Taxpayers Can Save With Offset Mortgages

Offset mortgages have been around for some time. One of the first offset mortgages were offered by Virgin in 1997 in conjunction with the Royal Bank of Scotland*. Known as the Virgin One account, the mortgage offset deal for the first time allowed UK consumers to set their savings against their mortgage repayments. There are now around 30 providers of offset mortgages**.

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 earning interest on credit balances in current accounts, with offset mortgages these balances are offset against the amount of outstanding debt. With some mortgage offset accounts, savings accounts are offset against mortgage payments, while other offset mortgages also allow current account credit balances to be offset against credit card debt as well.

All taxpayers can benefit from using their savings in this way, but offset mortgages are especially useful for borrowers who are paying high interest on their credit cards. Offset 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. Although they don't get this interest on their savings account, 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 per cent, save more than standard rate taxpayers, who pay 22 per cent 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.

A Flexible Offset Mortgage

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.

With offset mortgages, most providers set the mortgage payment once a year and this stays the same during that period unless offset mortgage holders ask for a review. This means that once the savings are offset against the loan, most offset mortgage holders are overpaying on the mortgage. Research has found that this can shave 8 years and 8 months off a standard 25 year mortgage and save as much as £44,867 in overall interest, depending on the level of savings and credit balances held by the mortgage holder*** .

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 which compare very well with the rates on standard mortgages. With the flexible features and potential tax savings, offset mortgages should certainly be considered by all taxpayers.

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© 2007 and 2008 Offset Mortgage Centre | Terms and Conditions | Privacy Statement | We don't charge a fee for admistration of an offset mortgage. The Offset Mortgage Centre is the trading name of The Mortgage Broker Ltd, (a whole of market mortgage broker), which is an appointed representative of Home of Choice Limited, which is authorised and regulated by the Financial Services Authority | Your home may be repossessed if you do not keep up repayments on your mortgage. *Source - Mortgage Strategy Supplement April 2007. **Source - Mortgage Strategy April 2007: There are now around 30 offset providers. ***Source Barclays Bank: Calculation based on an offset tracker product; repayment mortgage of £100,000 over a 25-year term that has been offset with £20,000 savings, resulting in a reduction in mortgage term of 8 years and 8 months or a saving of £44,867 in overall interest. Calculation assumes balance remains constant throughout the life of the mortgage and that the mortgage loan and savings balance will vary. Outcomes will be either a reduction in payments or a reduction in mortgage term. No interest is paid on balances offset against the mortgage.