Top Rate Tax Payers get Over 3 Times more from their Savings with an Offset Mortgage

News provided by

first direct

26 Mar, 2013, 08:30 GMT

LONDON, March 26, 2013 /PRNewswire/ --

For savings balances of £50,000:

  • 45% tax payers could be £996 better off in just one year with an offset versus an instant access savings account*
  • 40% tax payers could be £969 better off in just one year with an offset versus an instant access savings account*
  • 20% tax payers could be £860 better off in just one year with an offset versus an instant access savings account*

In the current environment of low interest rates everyone is hunting for the best home for their hard earned savings, especially high rate tax payers. 

For those wanting easy access to their savings an instant access account is a must, but with the Bank of England Base Rate likely to remain low for the foreseeable future, first direct argues that savers, especially high rate tax payers, with a large savings balance can get more benefit from offsetting their savings against their mortgage instead. 

first direct, which supplied nearly two fifths of all new offset mortgages in 2012, has compiled a table based on £50,000 in savings.  The table approximately illustrates the benefit in just one year of offsetting savings versus depositing them in an instant access savings account*. 

                           Average Instant
                           Instant Access
                           Access  Saver -
                           Savings interest              Saving by
                           rate    on                    offsetting Benefit of
                           after   GBP50,000             GBP50,000  offsetting
                           tax**   in one                for one    savings
    Income Tax Bracket     (AER)   year (a)  Offset rate year (b)   (b-a)
    45% (GBP151,000+ from
    6/04/13)               0.60%   GBP299.75 2.59%       GBP1,296   GBP996.25
    40% (GBP34,371 -
    GBP150,000)            0.65%   GBP327.00 2.59%       GBP1,296   GBP969.00
    20% (up to GBP34,370)  0.87%   GBP436.00 2.59%       GBP1,296   GBP860.00

Andy Forbes, Head of Retail Products at first direct commented: 

"For those people who have a mortgage and savings, offsetting is a fantastic option.  They can benefit from a higher equivalent rate of interest on their savings, pay less interest on their mortgage as well as the added benefit of having access to their savings at any time."

Notes to Editors

*Based on first direct's 65% LTV 2 year tracker offset currently 2.59% with a £1,499 arrangement fee added to a borrowing amount of £250,000 with savings of £50,000 (first direct has observed that offset mortgage holders tend to have savings balances of 20% of their borrowing).  Savings figure, £1,296, is based on reduction in monthly payment by offsetting £50,000 then x 12 to illustrate saving over a year. http://mortgages.firstdirect.com/offset-mortgage-calculator

**Source: Bank of England - Average monthly interest rate of UK monetary financial institutions (excl. Central Bank) sterling instant access deposits including unconditional bonuses from households not seasonally adjusted Jan 2013 - 1.09% (rounded to 2dp) http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxIRx&levels=1&XNotes=Y&C=O7Y&XNotes2=Y&Nodes=X40727X40728X40754X40755X45786X40759X78821&SectionRequired=I&HideNums=-1&ExtraInfo=true&G0Xtop.x=34&G0Xtop.y=8

N.B. Income tax bands will alter on 6 April 2013 https://www.gov.uk/income-tax-rates

ISAs cannot be linked to an offset mortgage

Offset saving explained

Instead of receiving interest on your savings, your savings and 1st Account balances are offset against your outstanding mortgage balance and you only pay interest on the difference between the two. Therefore, you can benefit from the equivalent of the same rate of interest on your savings and 1st Account as you pay on your mortgage, up to the amount outstanding on your mortgage.

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first direct facts

  • Winner of Best Lender for Offset Mortgages - Moneywise Mortgage Awards June 2012
  • Winner of the Which? Best Financial Provider and Moneywise Most Trusted Financial Provider awards 3 years running

first direct provides both telephone banking and online banking services to its 1.2m customers.  It offers a full range of personal banking products including its award winning Current Account and offset mortgages.