How offset mortgages could save you tax
A restriction on the amount of tax relief that landlords can claim on finance costs (e.g. mortgage interest payments) began to be phased in from 6 April 2017. It is the latest change to target beleaguered Buy-To-Let landlords, who have also seen the lending market halve in the last year (figures from Nationwide Building Society). It is therefore no surprise that landlords are looking to other types of mortgages to save some money, namely offset mortgages.
Offset mortgages involve tying a savings account to the mortgage so that the mortgage interest is calculated on the amount borrowed less the amount in the savings account, however you won’t receive interest on your savings while the mortgage is outstanding.
The premise is that the interest due is therefore assessed on a lower net amount. How this benefit is realised depends upon the type of offset mortgage. The two most common flavours are reduced payments, whereby the length of the mortgage remains the same but the monthly payments are reduced, or a reduced term whereby the monthly payments remain similar to a regular mortgage, but it can be paid off sooner. With less tax relief available on mortgage interest payments, there is more incentive to reduce them with an offset mortgage, even with the loss of interest in the tied savings account.
If your savings interest exceeds £1,000 per year – or £500 as a higher-rate taxpayer – you start to pay tax on that interest. Therefore, an offset mortgage, which effectively uses the interest on your savings to pay the mortgage, could potentially cancel out the tax relief lost on your mortgage interest payments.
Finally, offset mortgages allow groups of people, such as families, to pool their money in order to reduce interest payments on the mortgage.
There are some downsides to consider however, as offset mortgages do generally face higher interest rates than normal mortgages, and you may lose access to the savings account during its use. Despite this, if you have a pool of unused savings, or are exceeding the personal savings allowance on your interest earnings, offset mortgages may be worth considering to reduce your tax bill.