offset mortgages

How Offset Mortgages Could Save You Tax?

Do you know Offset mortgages could be a great way to save your taxes? You just need to utilize your savings to bring down the interest on a mortgage, eventually reducing the total cost by hundreds and thousands of pounds. Offset Mortgage can be called a hidden gem for saving tax in the mortgage world. So, in this blog, you’ll find out how offset mortgages could save your tax in bulk.

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Understanding Offset Mortgage:


An offset mortgage is a home loan, where a savings account is linked with the mortgage account that lowers your interest rate on the mortgage. If your saving account is linked with the mortgage, the balance of the saving account would be considered offset against the mortgage amount. Consequently, you pay less interest and can save thousands of pounds.

For e.g. if your mortgage account is £400,000 and you put £50,000 savings in the linked account, you only have to pay interest on £350,000.

offset mortgages


Reducing Monthly Payments with Offset Mortgages:


Offsetting allows you to reduce your monthly repayments. When you offset your savings, your mortgage repayments will automatically show the lower interest bill. Hence, you have the choice to pay above the repayments threshold or enjoy paying the reduced repayments.

You should note that the timespan of repayments will remain the same. Like if you offset £20,000 savings, with a £100,000 mortgage. The drop in monthly mortgage payments will be £95 and your total interest bill would fall down to £28,500.

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Types of Offset Mortgages:


There are four main types of offset mortgages:

  • Standard Offset
  • Current Account Mortgage
  • Family Offset
  • Flexible Mortgages


How Offset Mortgages Can Save Your Taxes?


Offset mortgages are one of the best ways to reduce your tax liabilities. You know that you have to pay income tax on the interest received from your saving account. The income tax consumes 40% of your interests. Instead, if you use those savings to offset your mortgage, you don’t need to pay tax on the resulting savings.

Like if you have £20,000 in your savings with an interest rate of 2.5%. You’d earn £500 a year as interest. But, if you’re basic rate taxpayers, you’d pay £100 against it. Similarly, at higher rates, taxpayers will pay £200.

With offset mortgages, you cannot avail the chance to earn interest on savings, but you can get more tax advantages on the mortgage. In this way, if you put £20,000 in your offset saving account against the £100,000 mortgage with a 3% interest rate you’d be saving £17,000 from tax calculations on the mortgage interest bill and can save your tax on it.

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Offset Mortgage is Suitable For:


  • A person who has savings and can earn an extra amount or a lumpsum amount
  • Self-employed who save a large amount for their tax-bill for easy access.
  • Employees earning annual bonuses.
  • High rates taxpayers.


Tips for you:


  • Search out the best offset deal
  • Prioritize your choices: whether it’s reducing the mortgage terms or reducing your repayments
  • Avail offset facility whenever required
  • You should note that Offset and flexible mortgages are different
  • Don’t borrow money for overpayments, do it only if the rate is cheaper than your mortgage


Quick Sum Up:


Along with the above merits, you should remember that offset mortgages generally face more interest rates than general mortgages. You might be unable to use your savings account while using it. Notwithstanding the fact, if you have bulk savings, and crossed the personal saving allowance on earnings from the interest, an offset mortgage would be imperative to bring down your tax bill.

Accotax has a team of chartered accountants to provide you balanced advice on finance, accounting, and taxation.

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Disclaimer:  This informative blog is for your basic understanding of the topic.

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