Investment Property Accountants - WARR & CO

Investment Property Accountants

Making Use Of An Offset Mortgage

Many people make use of an offset mortgage. Typically a maximum drawdown will have been agreed with the lender but the full amount will not have been drawn. Alternatively, the borrower may have deposited funds in an offset account. The advantage of such mortgages to borrowers is that the lender only charges interest on the net advance. In extreme examples a person may have deposited a sum in an offset account equal or very close to the amount of their mortgage. By doing this they pay little or no interest but enjoy instant access to the whole of the balance in their offset account.

It is often the case that such a borrower can actually get a higher return on the balance in their offset account than their lender is charging on their mortgage. However, in normal times this is generally not worthwhile because interest received is taxed whereas in general interest paid attracts no tax relief. So if a person has a mortgage rate of 5% and can earn 6% on savings they will be worse off if they are a taxpayer because 6% gross is worth 4.8% to a basic rate taxpayer and 3.6% to a higher rate taxpayer.

But times are not normal at present. Base rate dropped in March to 0.5% and many mortgage rates are between 0% and 1.5%. In contrast, banks are eager to attract savings and will often pay over 3% particularly on fixed term deposits. So if a person who has a mortgage rate of 1% and £250,000 in an offset account draws the full balance and invests at 3%, they will pay £2,500 interest over a year, but receive £7,500 interest. Even if they pay 40% tax they will still make a £2,000 profit over the year.

Should you have any queries or wish to discuss any of the points raised, please contact Tim Warr on 0161 477 6789.

Date of Article: 17th March 2009

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This domain is owned by Warr & Co Chartered Accountants which is a member of the Institute of Chartered Accountants in England & Wales (ICAEW). Whilst the information detailed here is updated regularly to ensure it remains factually correct, it does not in any way constitute specific advice and no responsibility shall be accepted for any actions taken directly as a consequence of reading it. If you would like to discuss any of the points raised and / or engage our services in providing advice specific to your personal circumstances, please feel free to contact Peter Edwards on 0161 477 6789 or email us at info@warr.co.uk

 

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