Is now the time to offset and save?
Following the Bank of England's decision to cut the base rate of interest to 0.25% a total of 285 savings accounts cut their rates in August, with 20 of the best deals disappearing completely. Savers could start feeling the pinch, but if you have a mortgage and savings that equate to at least 10% of your mortgage balance one option that could potentially benefit you is an offset mortgage.
An offset mortgage can be an effective way of reducing the amount of interest you pay on your mortgage by linking it to your savings account. Effectively, the money you have in savings is counted as a temporary overpayment towards your mortgage. So for example if you have a £200,000 mortgage and £40,000 in a savings account offset against it, you would only pay interest on £160,000. But your monthly mortgage payments will, most likely, be based on the full £200,000 loan. That means that every month you would effectively be over paying you mortgage.
Rather than having money sat in a savings account, with diminishing returns from saving rates, an offset mortgage can potentially allow you to pay off your mortgage quicker. Another benefit of offset mortgages are they allow you to have easy access to your savings while reducing how much interest you pay on your mortgage loan. If you paid your savings directly into your mortgage it would have the same effect, however you would have to ask your bank for the money back. An offset facility gives you complete flexibility.
Some lenders will also allow you to choose to reduce your monthly payments meaning that the monthly amount you pay on your mortgage is based on the value of the outstanding mortgage minus the money offset in savings. This allows you to bring down your monthly repayment but will mean that you won't pay off your mortgage faster.
Who could benefit from an offset mortgage?
Higher rate tax payers – as there is no interest paid on the money in your savings account there is equally no tax liability.
Self-employed – if you're saving money to pay a tax bill you can do this in an offset savings account. Equally instead of keeping your cash reserves in a business account that you pay for, you could withdraw this money and link it to your mortgage. If you are considering this you should talk to your accountant first.
Those undertaking substantial home improvements – you might need to borrow a sizeable amount for home improvements and then pay the builders in tranches. Using an offset means allows you to reduce you mortgage as you wait to pay out the monies, bringing your overall costs down.
Landlords looking to buy more properties – you can borrow against your main residence and put the money in the offset account whilst you wait to buy a new investment property. You can then set the offset to reduce your payments on a monthly basis.
It's important to discuss the possible benefits and disadvantaged of an offset mortgage with a mortgage broker before making a decision on any mortgage. The money held in offset accounts won't earn you interest and if you don't have much in savings, it's possible that you won't save much on the mortgage, in this case it might be better choosing an alternative deal with a lower interest rate.
Setting up a limited company for your buy to let properties. Is it worth it?