You earn no money on the cash you offset, but because you
are likely to be paying out more interest on your debt than
you would be making on your savings, this can make a lot of
sense especially if you're a higher rate taxpayer.
How the savings add up
Imagine you have £20,000 in an ordinary taxable deposit account
paying 6 per cent interest a year.
• As a basic rate
taxpayer, you will lose 20 per cent of this in savings
tax, making it worth 4.8 per cent or £960 a year.
If, instead, you use the £20,000 to cut the cost of an offset
mortgage, with an interest rate of 6.25 per cent, you will
save £1,250 (6.25 per cent of £20,000) an overall gain,
after the loss of that £960, of £290 a year.
• As a higher rate
taxpayer, you will lose 40 per cent of your deposit
account interest, making it worth just 3.6 per cent or £720
a year.
This means using the £20,000 to save £1,250 of mortgage interest
will actually leave you £530 a year better off.
Over a traditional 25-year mortgage
term, that adds
up to £13,250.
The offset choice
You can either opt to reduce your mortgage payments by this
amount (known as paying net) and simply enjoy spending the extra
cash.
Or you can leave your payments as they were and, by effectively
overpaying, clear your debt much faster (paying gross).
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