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last months Budget makes saving less profitable, Tax Interest is rising, Cash ISA limits are falling, and fixed limits are pushing more of us into higher tax bands. People with sufficient cash balance are looking for tax-efficient homes for Wealth Getting complicated.
One option that has received little attention in recent years is the offset mortgage. It’s a niche product, but new tax rules may mean more people should consider it.
“This announcement savings With income being taxed at a new higher rate from April 2027, there will no doubt be increased interest in offsets,” says David Hollingworth of L&C Mortgage.
“With the Cash ISA limit also being reduced, those who still want to hold cash may like the idea of effectively earning a mortgage rate on their savings and paying no tax as no interest is earned.”
Sounds ideal – so what exactly is it?
What is an offset mortgage?
An offset mortgage places your savings in an account linked to your mortgage. Your savings don’t earn any interest, but it is deducted from the amount outstanding on your mortgage, so you pay less interest on your loan.
For example, if you have a £400,000 mortgage and £100,000 in your linked savings account, you only pay interest on £300,000.
You can certainly pay more on your mortgage with that £100,000. But the advantage of offset mortgages is liquidity – you can still access your money if you need to, but when you No If needed, this can serve to reduce your overall interest bill.
“Offset mortgage “This can be very tax-efficient, especially for higher and additional rate taxpayers,” says Karen Noy, mortgage expert at Quilter. “While you earn interest on savings, tax is deducted once your personal savings allowance is used up.
“In contrast, using the same cash to reduce the balance on an offset mortgage means you save mortgage interest instead, and this savings is not taxed.
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“For someone paying 40 or 45 per cent tax on the interest on their savings, this could make a meaningful difference to the effective returns they get.”
Who should consider an offset mortgage?
Offsetting mortgages don’t work for everyone. In general, you must have a large amount of savings, have used up your tax-free savings options and pay a high level of income tax. For those with low balances or space left in their Allowance ISA, traditional savings may make more sense.
Additionally, fewer lenders have offset mortgage products, and they tend to have more interest rates instead Best deals on standard mortgages,
To see when an offset mortgage makes financial sense, let’s take a £250,000 mortgage with 15 years remaining. We’d compare keeping savings in an account that pays 3 percent while paying off a 4 percent mortgage versus offsetting the same cash against a 5 percent offset deal.
With savings of up to £100,000, the offset is a clear winner for higher and additional rate taxpayers.
How much can I save with an offset mortgage?
A higher rate taxpayer would pay £43,556 in interest on the mortgage over five years, while earning £10,561 on their savings after tax. So, their net interest costs will be less than £33,000. By contrast, they would pay £27,000 in interest on their offset mortgage – a saving of £6,000.
Additional rate taxpayers see even better returns with offsetting because more of their savings returns are lost to the tax. Even basic rate taxpayers are better off at this stage, by around £3,000.
The difference narrows to a saving of £75,000.
Higher and additional rate taxpayers still benefit from the offset – in this example around £1,600 and £3,200 respectively – but a basic rate taxpayer stands to lose money with the offset and would be better off keeping the savings aside.
Reduce the amount in the savings account to £50,000 and the offset is no longer beneficial to anyone. The interest saved on the mortgage is not enough to offset the higher interest rate on the mortgage.
These calculations use today’s tax rules and do not take into account the higher tax on savings coming from April 2027. The tax on savings will rise to 22 per cent for basic rate, 42 per cent for higher rate and 47 per cent for additional rate taxpayers. The offsetting benefit will then increase for those who have maxed out their other tax-free savings options.
But you still need to take into account the different interest rates you get on savings accounts, standard mortgages, and offset mortgages, or what returns you might get if you invested the money instead – which again will involve questions of liquidity.
“Whether it’s worth paying a higher mortgage rate will depend on what level of tax you pay, how much savings you have, and whether you plan to spend any of those savings over the life of the mortgage,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “You’ll need to do the math to see if it works for you.”
Offsetting mortgages will never become mainstream, as normal savings routes are more straightforward for most people. But for high-income people with large cash balances who are running out of tax-free shelters, an offset can be an efficient home for their money.
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