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The Offset Account may be a sensible choice if you need a mortgage and you, or a family member, also have savings. The Offset Account offers you the chance to save the income tax you would normally pay on those savings. The higher the rate of income tax you pay the more you could save.
What is an Offset mortgage?
With conventional savings and mortgage accounts you receive interest on your savings and you pay interest on your mortgage. If you are a standard rate tax payer, tax at 20% is deducted from the interest you receive on your savings. If you are a higher rate tax payer 40% is deducted.
With an Offset Account, savings and mortgage are linked as two elements of one account.
No interest is paid on the savings. This means that there is no tax to deduct. The attraction of an Offset Account is that every month an amount equal to the gross interest you would have earned on your savings is credited to your mortgage account without the deduction of tax. This reduces your mortgage balance. A smaller mortgage balance means that you are charged less interest on your mortgage as the months go by. The interest rate used to calculate the credit to your mortgage account is always the interest rate that is applicable to your mortgage. We offer two separate Offset mortgage products, one linked to your own savings and one linked to the savings of a family member (Family Offset). Only one of these options can be held at any one time.
The mortgage repayment is calculated on the gross mortgage balance and not on the net amount of your mortgage and savings balances.
Other features of our Offset Accounts
- Each year, on the anniversary of the completion of the mortgage, the Society provides an annual review facility whereby the remaining term of your mortgage can be shortened or extended, (see Offset Terms & Conditions for more details)
- There are no overpayment restrictions on an Offset mortgage
- Your savings are always available for withdrawal with instant access
Here's an example of how our Offset mortgage works
Let's say you have a mortgage for £150,000 and savings of £50,000, and the interest rate on your mortgage is 3.45% (3.5% APR variable).
If your mortgage was a conventional interest-only mortgage, you'd be charged mortgage interest of £5,175 per annum (£150,000 x 3.45%) and, unless you make overpayments, your mortgage balance would not reduce.
With our Offset Mortgage, your mortgage balance would reduce each year by £1,725. This is the amount that your savings of £50,000 would earn in a conventional savings account at 3.45% without tax being deducted.
If you are a basic rate tax payer and you earned this as interest on your savings instead, you would only receive £1,380, a difference of £345 per annum. Over a 25 year mortgage the "savings" would be £8,625. The interest rate on your savings would need to be 4.32% for you to receive interest of £1,725 net of tax.
If you are a higher rate tax payer it gets even better, you would normally only receive £1,035, a difference of £690 per annum. Over a 25 year mortgage the "savings" would be £17,250. To receive the £1,725 your savings would need to be earning 5.75%. And remember your savings are available at any time for you to withdraw if you wish.
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How an Offset mortgage can reduce your mortgage term and save you interest
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Let's say you have a repayment mortgage for £150,000 and savings of £50,000. Assuming your Offset savings balance does not change and you don't change your monthly mortgage repayment, you could reduce the term on a 25 year mortgage by almost 6 years and save around £18,000 in mortgage interest.
The figures in this example assume an interest rate of 3.45% for the life of the mortgage. |
Please note that if the balance on your savings element exceeds 50% of the balance on your mortgage, the excess amount in the savings element will not be used when calculating the amount of mortgage interest to be offset, and you will receive no interest on the excess.
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