Property To offset or not to offset?

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I have just helped a client release some equity in his home to use for refurbishment and another purchase. As part of the process I recommended that the funds should be held in an offset mortgage.

Offset facilities are not for everyone but can be really useful for a certain group of people. In particular, if you have fluctuating income from perhaps bonuses or partnership share and would like to iron out these fluctuations. 

An offset facility puts any excess cash you have in a savings account dovetailed into your mortgage account. Every £1 you hold in that account, saves you paying the mortgage interest on £1 of the mortgage. 

As you can see if you have a mortgage of £250,000 and you have £250,000 on the attached savings account, the monthly interest cost of the mortgage will be zero.

Offset mortgages are offered on interest only and capital repayment basis. With interest only, it is your responsibility to provide sufficient funds at the end of the mortgage term to repay the debt or your property could be repossessed. With a capital repayment mortgage, you will still have monthly repayments to make, however these will comprise only capital if your debt is fully offset as above.

If you had a normal high street mortgage at the same level, you will currently be paying around £312 per month (based on current interest only fixed rates). If you then have the same amount of money sat in savings you could earn up to 1% on that, depending on where you put it and how long you keep it there. However you also must consider the tax charged on savings earnt. Both scenarios need careful consideration.

My recent client wanted to release funds for two reasons - to do work on his current home and to purchase a holiday home. At the stage of mortgage application, he had no fixed plans of when he wanted to purchase his second property or start work on his house. The offset facility allowed him to draw down the funds and benefit from the current low interest rates and then sit all the funds on the attached savings account and have ‘0’ interest charge until he required them. 

As he was also looking to draw the funds in separate tranches he would only pay interest on the funds he drew. My client has a reasonable level of income and plans to pay his monthly income into the savings account meaning he will pay little interest on a day to day basis.

I also had a conversation with a barrister last week who liked the idea of an offset facility to reduce costs and set aside funds for her annual tax bill - gaining some interest in the process. 

If you’d like to discuss if an offset mortgage is the right option for you, do get in touch. 

Simon Morgan – Latest Blog Posts

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