Homeowner: would you rather get up to 10.02 per cent on savings or waste 546 million

28.06.2005 UK mortgage borrowers could be earning the equivalent of up to 10.02 per cent on their savings, but instead are needlessly giving more than £546 million¹ to the taxman, according to research from first direct, the UK's most recommended bank.
The reason is that most are missing out on an offset mortgage, which effectively enables homeowners to earn a tax-free interest rate on their savings and current account balances equivalent to their mortgage rate - rather than the normal savings rates, which are inevitably lower and liable to tax.

first direct reckons that the nation's 14 million-plus² non offset mortgage holders have an average of around £5,000³ each in savings and £1,000⁴ in their current accounts, earning around £170⁵ a year in interest per person. The 12.7 million standard rate and 1.6 million higher rate taxpayers⁶ give nearly one quarter (22 per cent) of this £2.4 billion - or £546 million - straight to the taxman.
Offset customers, on the other hand, have their mortgage debt linked to their savings and current accounts, reducing the interest payable by offsetting the (negative) debt against the (positive) balances.
To be as well off with a conventional capital repayment mortgage, lower and higher rate taxpayers would need to find accounts paying 7.43 per cent and 10.02 per cent respectively after the tax liabilities have been taken into account.
Here's how offsets work. Supposing a homeowner has a £100,000 mortgage and £6,000 savings (£1,000 in a current account and £5,000 in a savings account). With a conventional mortgage, they would pay interest on the mortgage and earn interest on the savings and current account. Typically, they would be paying a higher rate on the mortgage than they'd be earning on the savings, while the interest earned on the current account would be lower still.
With an offset mortgage, they would earn nothing on the £6,000 in their savings and current accounts, but would only pay interest on £94,000 of the mortgage. In effect, they would actually earn a rate of interest on their savings and current account equivalent to the mortgage rate - which is higher than they'd earn on savings and current accounts normally. It is this 'virtual interest' that is paying off the interest on the £6,000 portion of the mortgage that is being offset by their savings.
Richard Kimber, first direct's chief executive, said: "We all know that paying off debt makes more economical sense than earning interest on savings, yet we also need the financial security of a savings account. With an offset - what we call a 'savings mortgage' - customers get the best of both worlds and it'll even work towards defeating the spectre of Hector by lowering tax liability. Why aspire to the jet set, when you can join the off set right now?"
first direct has two offset mortgage offers - a rate of 4.99 per cent for three months followed by a standard variable rate currently 5.75 per cent giving an overall cost for comparison of 5.9 per cent APR, or they can choose first direct's popular three-year fixed rate offset at 5.49 per cent (APR 5.9%).
19/04/2005UK