How an Offset Mortgage Lowers Mortgage Payments

Offset Personal Savings Against Your Mortgage to get Tax Savings

Apr 14, 2009

An offset mortgage helps homeowners with personal savings to reduce mortgage payments. Enjoy tax savings, particularly if paying higher-rate taxation.

The offset mortgage, also known as the current account mortgage, provides families with the opportunity to 'offset' personal savings against the loan on their house. The non-payment of interest on that section of the loan enables homeowners to minimise mortgage payments.

Higher-rate tax payers can also benefit appreciably from tax savings as income tax is no longer payable on those personal savings. A mortgage broker can help a homeowner identify the best offset mortgage deal, but this isn't a necessity for the more cost-conscious borrower.

How an Offset Mortgage can Reduce Monthly Payments

With bank base rates at a 315 year low of 0.5 per cent, personal savings aren't yielding the returns they once did. An offset mortgage allows a family to 'offset' any money sitting in their current account against the loan on their house.

For example, let's assume that Mr and Mrs Smith are paying 6% APR on a £250,000 loan over 25 years. The Smith family also have £50,000 in savings in their current account. This means that any personal savings can be utilised to reduce mortgage payments as part of an offset mortgage deal.

The offset mortgage has enabled Mr and Mrs Smith to reduce their mortgage payments by £325.92 pcm. Whilst personal savings do accrue interest when in a savings account, interest rates are very low and taxation is payable on any returns.

Benefit from Tax Savings on an Offset Mortgage

The offset mortgage allows a homeowner to enjoy tax savings as taxation was previously payable on any returns. Taking out an offset mortgage is more tax-efficient, especially for higher-rate tax payers. It doesn't make sense to take an income from savings, pay taxation on any returns and then meet monthly mortgage payments. An offset mortgage or current account mortgage is far more efficient.

Can a Mortgage Broker Reduce Mortgage Payments?

A mortgage broker can help a homeowner select the right offset mortgage. They have access to systems that trawl the market for deals that minimise mortgage payments. Other mortgage brokers have useful industry contacts. However, their services generally incur a fee of 1 per cent of the loan amount.

Homeowners that do have access to over £30,000 of personal savings should seriously consider an offset mortgage. It allows families to reduce mortgage payments and enjoy tax savings. It isn't necessary to go through a mortgage broker, although this may be helpful for those that don't have much experience with mortgage products.

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