Offset mortgages revisited

For some borrowers, low interest rates have provided an easy route towards accelerated capital repayments. ‘Offset’ mortgages are arrangements whereby monthly interest is due not on the entire mortgage balance but on the difference between this figure and the total value of any money deposited with the lender in ‘associated’ accounts. Those with significant savings with the lender may decide that there is less need to consider seeking more favourable rates than those whose sole relationship with the lender is a conventional mortgage.

Sounds strange?
By holding money in an ‘offset account’, the effective interest rate you receive is equal to the rate of interest on the mortgage itself (which is likely to be higher than you could get from any savings account). A rise in the mortgage rate means that you are in effect getting more for your savings. More importantly – especially for higher rate taxpayers – there is no tax liability (unless savings are higher than the outstanding mortgage); the interest element of each monthly payment is simply reduced. Money invested anywhere else except in an ISA is normally subject to tax on the interest.

What happens to repayments?
Those with offset arrangements do not pay less each month. Instead, the repayment level set at the outset (adjusted for any change in interest rates) remains the same and any excess brought about by the fact that savings ‘offset’ borrowings is used immediately to reduce the outstanding balance. The following month, even less interest will be due, but as repayments remain the same, the effect is further to accelerate repayments. Borrowers, who maintained the initial level of repayment during the two years of very low interest rates, should have reduced their debt by a considerable margin. This would suggest that continuing current repayment levels will ensure ongoing overpayments which will eventually reduce the mortgage term. For those who do wish to consider a fixed rate mortgage, some offset mortgages now offer this option. Mortgages are complicated and there are many differing plans available. It is therefore important that you should seek professional advice before making any decision relating to your personal finances.

Your home may be repossessed if you do not keep up the repayments on your mortgage. A fee may  apply for mortgage advice and you must ask your adviser for details before making any decision relating to a new mortgage as the actual amount will depend on your personal circumstances, but in most cases is unlikely to exceed 0.5% of the loan value (on a typical £100,000 mortgage, this would be £500).

For mortgage advice please contact the Financial Planning Partners or Mark Bugden. For additional financial services such as pensions and SIPP's visit us online. Our IFA's operate in Ascot, Sandhurst, Bracknell, Wokingham, Reading, Crowthorne and Berkshire.