07 April 2010 / by Rachael Stiles
Savers who pay a high rate of 50% tax could mitigate the negative returns on their savings by opting for an offset mortgage, says moneysupermarket.com.
The comparison website has found that there are no savings accounts in the UK which offer a positive return after inflation to 50% taxpayers, but they could save on the interest on their home loan by choosing an offset mortgage.
A savings account would have to pay a rate of at least 7.4% to counteract inflation and the new 50% income tax bracket, but the impact of current interest rates and inflation has left savings account interest rates languishing well below this mark, meaning that taxpayers in this bracket can get no real returns with a savings account.
But, offset mortgages offer an alternative for those 50% taxpayers who have savings and a mortgage, as they can save more this way than they would earn in even the highest rate savings account.
Offset mortgages offset the borrower’s savings against their outstanding mortgage balance, so while no interest is earned on the savings, the only interest paid on the debt is the outstanding balance after the savings have been deducted.
For example, offsetting savings of £20,000 against a £100,000 mortgage would see the borrower only paying interest on £80,000 of their home loan, and not having to pay tax on returns from savings.
In addition to saving more than they could earn with a savings account, offset mortgages also help borrowers by reducing the time it takes them to repay their mortgage, and the cash balance can still be accessed any time.
Commenting, Hannah Mercedes-Skenfield, mortgage channel manager at moneysupermarket.com, said: “Many people in the new 50 per cent 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.”
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