Offsets better for higher rate taxpayers

However, the impact of base rates at an historic low of 0.5 per cent and the Retail Price Index of 3.7 per cent is that there are now no UK savings accounts that will give 50 per cent taxpayers a real return on their savings.
However, for those 50 per cent taxpayers with savings and a mortgage, now could prove the perfect time to consider switching to an offset mortgage deal as a way of providing an alternative to poor paying savings accounts.
These types of 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. 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.
For example, customers taking out a £175,000 offset loan from Woolwich at 2.89 per cent and holding £50,000 in a linked savings account, would only pay interest on the remaining £125,000, saving £13,372.09 in interest over the lifespan of the mortgage and knocking four years off the payment term. To be to match this deal, savers in the 50 per cent tax band would need to find a savings rate of at least 6.2 per cent. This compares with the highest currently available savings account rate, which is five per cent.
Hannah Mercedes-Skenfield, mortgage channel manager at moneysupermarket.com, said: "Many people in the new 50 per cent 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."