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."