Savers better off with offset mortgage
People with spare cash are better off using it to offset their mortgage than saving it in a cash ISA, new research has found.
A study by First Direct shows that over the past 10 years typical cash ISA savers, who also hold a mortgage, would have been better off by placing their savings pot in a mortgage offset account.
Based on average cash ISA rates and average mortgage rates over the last decade, if savers had tucked away their maximum cash ISA allowance into an offset account instead of a cash ISA, they would be £3,306 better off.
Here are the sums: saving the maximum amount each year into cash ISAs over the past 10 years would now be worth £38,328. First Direct says someone saving the same sum into an offset mortgage would have saved £31,200, but also knocked an additional £10,434 off their mortgage, making a total saving of £41,634.
Offset mortgages work by offsetting consumers' savings against the debt of their mortgage. Unlike a savings account interest is not earned on the balance of the savings pot, instead this pot is offset against the outstanding mortgage balance, with interest only accruing on the remaining balance. So, if you had a £100,000 mortgage and offset £20,000 of savings, you’d only pay interest on £80,000.
This means the mortgage will be paid off earlier, and the interest paid on the mortgage will be significantly less with no tax payable. The cash balance in the offset account can still be accessed at any time.
Price comparison site moneysupermarket.com says people that fall into the new 50% tax bracket (earning more than £150,000) could especially benefit from offset mortgages.
The site says that people paying 50% tax would need a savings account paying at least 7.4% to beat the effects of tax and inflation. However, there are currently no UK savings accounts that will give 50% taxpayers a real return on their savings.
Hannah Mercedes-Skenfield, mortgage channel manager at moneysupermarket.com, says: "Many people in the new 50% tax bracket will be looking at ways to limit the impact of both tax and inflation. As a result, offset mortgages are an extremely attractive option for borrowers who also have a decent savings pot.
"It's worth noting however that offset deals won't necessarily be the right option for all prospective borrowers. The savings that consumers could realise will depend on the proportion of the mortgage debt they hold in savings and the rate they pay on their mortgage. Don't forget to factor in any additional costs of remortgaging as these could be high depending on the offset mortgage you choose."
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.