Borrowers can reduce mortgage interest, mortgage term and tax liabilities by offsetting their savings against their mortgage, according to MoneySupermarket.com.
Interest rates on the top paying savings accounts have fallen considerably in recent months so savers will be looking at viable alternatives to make their money work harder for them.
An option for Mortgage holders is to use an offset, which can not only reduce the amount of mortgage interest and the term of the loan, but can help reduce tax liabilities.
An offset mortgage allows borrowers to link their savings to their mortgage balance.
Instead of earning interest on savings, the money is set against the outstanding mortgage, with interest only accruing on the remaining balance.
As a result, less interest is paid on the mortgage debt, and the mortgage can be paid off earlier. For example, someone with a £150,000 mortgage and £30,000 in savings would only be charged mortgage interest on £120,000. However, in many cases the mortgage repayments would be based on the full £150,000 loan meaning they overpay each month.
For example, assuming a £150,000 capital repayment mortgage at a rate of 3 per cent, borrowed over 25 years, someone with £30,000 in savings would save themselves £10,039 in interest and repay their mortgage three years early.
Clare Francis, mortgage expert at MoneySupermarket said: “The advantages of an offset mortgage are evident to see for people who have decent savings pots but who are struggling to find a real return for those savings. In addition, offsetting can also save you tax – usually, you pay income tax on interest you earn on your savings. However, because you don’t earn any interest if the money is offset against your mortgage, there is no tax to pay, making this a particularly attractive option for higher and top rate taxpayers.
“Of course, you could have a standard mortgage and use your savings to pay a chunk of it off, but if you do this it is difficult to get at that money again if you ever need it. With an offset, you can access your savings at any time. In addition, most mortgage products restrict the amount you can pay off each year – it is usually capped at 10 per cent of the outstanding balance. Offsets have no such restrictions.”
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