Off set mortgages could help 50% taxpayers mitigate poor savings returns, experts claim

News - Tax

Written by Ray Clancy

Thursday, 08 April 2010 08:11

Taxpayers who fall into the 50% bracket should look to offset mortgages to mitigate negative returns on their savings as there are no accounts in the UK giving a positive return after inflation, it is claimed.

New data from moneysupermarket.com 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% means that there are now no UK savings accounts that will give 50% taxpayers a real return on their savings.

The company’s experts say that for those 50% taxpayers with savings and a mortgage it could be worth switching to an offset mortgage deal as a way of providing an alternative to poor paying savings accounts.

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, the company says.

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.

It gives an example of a customer taking out a £175,000 offset loan from Woolwich at 2.89% and holding £50,000 in a linked savings account. They 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% while the highest currently available savings account rate is 5%.

‘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,’ explained Hannah Mercedes-Skenfield, mortgage channel manager at moneysupermarket.com.

‘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. You also need to factor in any additional costs of remortgaging as these could be high depending on the offset mortgage you choose,’ she added.