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Our clients were looking to purchase a property in the South of England for £1.15 million. They required a mortgage of £500,000, against which they intended to offset £200,000 in savings. This was because they wanted guaranteed instant access to the money – which would not have been possible if they had used it to reduce the mortgage to £300,000 – and wanted a better return on it than if it had simply sat in an instant access account.
A standard flexi-access savings account might yield an interest rate of 3%, however, if the client chooses to offset their mortgage, which is being charged at a rate of 5.5%, they are essentially receiving a return of 5.5% on their £200,000 in the savings account. The offset mortgage rate does come at a slight premium, but this is comfortably ‘offset’ by the gain in return on savings. Another benefit is that they don’t have to pay tax on the interest as they’re not actually realising the gain.
Initially, they did try their own high street bank and received an agreement in principle for a fixed rate offset interest-only mortgage. However, it then took two months before they could get an appointment with the bank’s mortgage adviser for a full mortgage interview, at which point they were turned down as the term would take them past age 65. Fortunately for our clients, they also consulted Private Finance for a second opinion and we suggested submitting a second application as a backup.
When their own bank deal fell through, our clients switched to the offset deal that we had negotiated for them from an alternative lender, who was prepared to lend to age 70. This meant that they did not have to drop out of the purchase transaction and lose their desired property.
A £500,000 offset interest-only mortgage was negotiated based on a £1.15 million valuation. The clients were extremely happy with this outcome and relieved that they had consulted Private Finance in case their own bank failed to deliver the finance initially agreed.
With an offset mortgage, the balance of the savings held within your offset account is offset against your outstanding mortgage debt, reducing the amount of interest you pay on the mortgage.
This will enable you to clear your mortgage more quickly and pay less interest in the long run, while retaining access to your savings in case of emergency. With most offset accounts you can choose to either have smaller monthly payments or a shorter overall term.Learn more