Offset loans continue to boom
By Chris Gilchrist 28th
August 2007
More and more homeowners are switching to offset loans when they re-mortgage, and
for small businesses there’s an appealing tax benefit too. From nowhere a few years
ago, offset mortgages have zoomed in popularity and now account for over 8% of all
new mortgage lending - almost £30 billion last year. Most offsets loans are organised
via mortgage brokers rather than direct, possibly because of the subtle 'small print’
differences between them. That means it’s more difficult to compare them than it
is standard mortgages.
Compare the best offset
rates on the market here
Cut your mortgage interest without losing your savings
The main advantage of the offset mortgage is that by combining your savings and
mortgage you earn interest on your savings at the mortgage rate. Say you have £20,000
of savings on which you earn 4.2% net of tax (6% gross) and a £100,000 mortgage
on which you pay 6.5%.
So you get £840 a year in net interest and pay £6,500. Combine the two in an offset
loan and you pay interest of £5,200 on £80,000. That means your £20,000 of savings
are earning you £1,300 a year and you are £460 a year better off.
That is not the only benefit. With an offset loan you agree a maximum mortgage -
in the example above it would be £100,000. You can then pay off some of it and then
re-borrow up to that maximum figure, no questions asked. So you can 'overpay’or
'underpay’ your mortgage, with lump sums as well as monthly repayments, as you wish.
It’s this flexibility that appeals to most borrowers.
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Innovative ways to use offset mortgages
But many offset borrowers also get a bigger financial savings because many of them
are higher rate taxpayers, and will therefore benefit even more than the example
I showed earlier, because they pay tax at 40% on the interest on their savings.
One lender, Yorkshire Bank, even offers a way for sole traders and partnerships
to use the credit balances they hold within their businesses to offset their personal
mortgages. Within the business, the interest on savings would be taxable, but used
against an offset the interest - and the tax - vanish. Neat.
www.yboline.co.uk
A couple of years ago there was a premium of about 0.75% for offset mortgages, but
today it’s down to 0.25% and maybe even less on selected deals. But many people
with chunks of money on deposit will be better off paying even 0.5% more interest
with an offset loan - the more savings you’ve got, and the more tax you pay ion
savings interest, the bigger the benefits you gain from offsetting. So it’s a fair
bet that the offsetting boom is going to continue.
Personally, I made the switch to offset two years ago and can’t imagine I’ll ever
go back to a conventional mortgage.
Compare the best offset
rates on the market here
Article produced by EveryInvestor.co.uk
