50 per cent taxpayers should consider offset mortgages
The research shows that savers and borrowers who fall into the new income tax bracket of 50% would need a savings account paying at least 7.4% to beat the effects of tax and inflation. However, the impact of base rates at an historic low of 0.5% and the Retail Price Index of 3.7% is that there are now no UK savings accounts that will give 50% taxpayers a real return on their savings.
However, switching to an offset mortgage deal could be the answer. These types of mortgages work by offsetting consumers’ savings against the debt of their mortgage. Unlike a savings account interest is not earned on the balance of the savings pot, instead this pot is offset against the outstanding mortgage balance, with interest only accruing on the remaining balance. This means the mortgage will be paid off earlier, and the interest paid on the mortgage will be significantly less with no tax payable. The cash balance in the offset account can still be accessed at any time.
For example, customers taking out a £175,000 offset loan from Woolwich at 2.89% and holding £50,000 in a linked savings account, would only pay interest on the remaining £125,000, saving £13,372.09 in interest over the lifespan of the mortgage and knocking four years off the payment term. To be to match this deal, savers in the 50% tax band would need to find a savings rate of at least 6.2%. This compares with the highest currently available savings account rate which is 5%.
Hannah Mercedes-Skenfield, mortgage channel manager at moneysupermarket.com, said: “Many people in the new 50% tax bracket will be looking at ways to limit the impact of both tax and inflation. As a result offset mortgages are an extremely attractive option for borrowers who also have a decent savings pot.
“It’s worth noting however that offset deals won’t necessarily be the right option for all prospective borrowers. The savings that consumers could realise will depend on the proportion of the mortgage debt they hold in savings and the rate they pay on their mortgage. Don’t forget to factor in any additional costs of remortgaging as these could be high depending on the offset mortgage you choose.”