As a nation, we're very keen on setting aside our spare cash into a savings account. But if you've already set aside a chunk of money for a rainy day and you have a mortgage, it may be time to consider an offsetting arrangement to make your savings work harder. This is exactly what Jean and Graham Smith from Lancashire did when they moved home last year.
They switched from a repayment mortgage to an offset arrangement. With their offset mortgage any savings they have are deducted from the amount they owe on their home loan and interest is charged only on the difference. They currently have a mortgage of £150,000 and £15,000 in a linked savings account, so they only pay interest on the net balance of £135,000.
While Jean and Graham won't earn interest on their savings, they'll pay less interest on their mortgage and shorten its term. And because they aren't earning interest they don't have to pay tax on their savings. So this is especially attractive to Graham who's a 40% higher-rate taxpayer as he'd usually see 40% of interest lost to tax in a traditional savings account.
But equally basic-rate taxpayers could also benefit from offsetting. For instance Jean is self-employed and uses their offset to put money aside for her tax bill. Those wanting to save for home improvements, or children's school or university fees could also benefit. Homeowners who receive bonuses or an inheritance may find offsetting attractive as you can pay your mortgage without tying up your cash as you would if you overpaid on a standard mortgage.
The offset concept is flexible, so you can pay off lump sums, underpay and take payment holidays from repayments if needed. Jean and Graham currently make use of the overpayment facility and make extra payments to help shrink their home loan. They also plan to increase the amount they have in the savings account so they end up paying as little as possible in interest on their mortgage over time.
Offset mortgages tend to be competitive priced as lenders want customers to remain loyal to the same provider for the whole of the mortgage term and beyond. To make offsetting work experts recommend having around 10% of your mortgage in savings for offsetting - so these products can suit a wide range of borrowers with decent savings including first-time buyers, those looking to remortgage and those who are moving home, and those who simply like to make their money work harder.
