Is an offset mortgage the answer to your debt dilemma?

Clearing what you owe while trying to save is tricky, but maybe your home loan can help

David Cameron wants us all to pay off our credit-card debt, but for homeowners covering monthly mortgage repayments and trying to save for a rainy day, this is far easier said than done.

Trying to clear debt and build a savings pot is always tricky, but could offset mortgages be the answer?

The principle behind an offset mortgage is straightforward – you set your savings against your mortgage debt. By taking out a mortgage and a linked savings account, instead of earning interest on your savings you offset them against your debt and pay interest only on the remaining balance. So, on a £150,000 mortgage at 4 per cent with £20,000 savings, you would only be charged interest on £130,000 of your mortgage balance which, over the year, could save you up to £800 in interest.

When savings rates are low, offset mortgages come into their own because you can often save far more than you would ever earn in interest. And, you don't pay tax on any interest saved as you would with most savings accounts.

"With interest rates remaining at historic lows, people have looked at different ways in which to make their savings, large or small, work as hard as possible," says Andy Gray, Barclays' head of mortgages. "The flexibility to cut the cost of a mortgage but retain easy access to cash savings is a great combination, and, at the same time, the effective return on savings will generally outweigh deposit rates, especially after tax."

Any money being saved can be used to clear other debt or to top up the offset savings which will lead to even bigger savings on your monthly mortgage repayments. Because repayments on a mortgage are paying both interest and the actual debt, if you can reduce the amount of interest, more of your monthly repayments are clearing the loan and you can pay off the mortgage more quickly.

Offset mortgages are not only beneficial to those with impressive savings pots. Even a modest sum can make a noticeable difference, and an offset mortgage could be the ideal place to start building your nest egg while savings rates are so poor for instant-access accounts. Better rates may be available from fixed savings accounts, but these levy charges if you want early access to your money.

When you take the tax savings into account, offset mortgages look even more attractive. Because you aren't paying tax on the money saved by reducing your mortgage interest, you can effectively boost the interest rate of an offset mortgage by either 20 per cent or 40 per cent for higher rate taxpayers when comparing them with a taxable savings account.

If you have a house worth £300,000 with a £250,000 mortgage, assuming you pay 5 per cent interest, that means £12,500 to the lender every year. If you also had £50,000 in a savings account earning 3 per cent annual interest you would earn £1,500 every year, but after tax this would fall to £1,200 (if you are a basic-rate taxpayer) and £900 (for high-rate taxpayers). If you were to offset that £50,000 instead, you would pay interest only on £200,000, bringing the sum payable to the lender down to £10,000 for the year.

"This results in an annual saving of £1,300 if you are a basic-rate taxpayer, or £1,600 if you pay 40 per cent tax," says Kusal Ariyawansa, of independent financial adviser (IFA) Appleton Gerrard Wealth Management.

Offset mortgages have a reputation for being too restrictive, but if anything they are more flexible than traditional mortgages – as most allow for unlimited overpayments. Plus, you can simply withdraw your savings when you want – but you will then lose the benefit of offsetting that money against your mortgage. And this can cause problems: "It can be oh so tempting to take money out to spend on a nice holiday," says Mr Ariyawansa.

More importantly, you must always check the numbers add up, as offset mortgages tend to have higher interest rates. For those who can access the very best rates on traditional mortgages it will be a matter of calculating whether they will really be better off with an offset facility.

Scott Gallacher from IFA Rowley Turton uses the example of HSBC's Lifetime Tracker at 2.49 per cent and Abbey's offset Lifetime Tracker at 2.95 per cent. The extra 0.46 per cent payable on the mortgage balance is worth £460 on a £100,000 mortgage.

"The initial rate of the HSBC tracker is so low that to offset this, basic-rate taxpayers would need to earn only 3.11 per cent. The Nationwide MySave Online Plus account paying 3.12 per cent would be sufficient," he says. Higher-rate taxpayers would need 4.15 per cent, however, which no instant-access accounts can match.

Bear in mind that the gap between rates on standard mortgages and offset mortgages is closing, however, and there are many lenders who charge only a small premium, while others, such as Clydesdale, don't charge a different rate at all.

"If you can get one that doesn't charge a premium then it's a bit of a no-brainer – if you have got a premium to pay you've got to work out if you're going to use the offset facility enough," says Ray Boulger from mortgage broker John Charcol.

An independent mortgage adviser will be able to tell you whether an offset mortgage is the right option for you.

Expert View

Ray Boulger, John Charcol

"The people that offset mortgages make the most sense for are higher-rate taxpayers, but it also depends how volatile your cash flow is. An offset facility gives you access to your savings, so if you have a volatile cash flow, whether you receive annual bonuses or you're self-employed and saving up money for tax, you're going to benefit more."

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Financial Controller

    £45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Recruitment Genius: Sales Adviser - OTE £24,500

    £22500 - £24500 per annum: Recruitment Genius: Inbound and outbound calls with...

    Recruitment Genius: Business Development Executive / Sales - OTE £40,000

    £18000 - £40000 per annum: Recruitment Genius: This fast growing Insurance Bro...

    Day In a Page

    Mullah Omar, creator of the Taliban, is dead... for the fourth time

    Mullah Omar, creator of the Taliban, is dead... again

    I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
    Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

    Margaret Attwood on climate change

    The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
    New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

    New Dr Seuss manuscript discovered

    What Pet Should I Get? goes on sale this week
    Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

    The cartoon hedgehog leading the way into a whole new reality

    Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
    Ants have unique ability to switch between individual and collective action, says study

    Secrets of ants' teamwork revealed

    The insects have an almost unique ability to switch between individual and collective action
    Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

    Donovan marks his 50th year in folk

    The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
    Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

    Simulator recreates thrill of F1 circuit

    Rory Buckeridge gets behind the wheel and explains how it works
    Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

    Twitter accused of 'Facebookisation'

    Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
    Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

    Jane Birkin asks Hermès to rename bag

    The star was shocked by a Peta investigation into the exotic skins trade
    10 best waterproof mascaras

    Whatever the weather: 10 best waterproof mascaras

    We found lash-enhancing beauties that won’t budge no matter what you throw at them
    Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

    Diego Costa: I go to war. You come with me...

    Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
    Ashes 2015: England show the mettle to strike back hard in third Test

    England show the mettle to strike back hard in third Test

    The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
    Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

    Charley Hull: 'I know I'm a good golfer but I'm also just a person'

    British teen keeps her feet on ground ahead of Women's Open
    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
    Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

    Our choice is years of Tory rule under Corbyn or a return to a Labour government

    Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'