Tax advice of the week: Take out an offset mortgage
Jan 27, 2012
Before the pain of filing your tax return has receded, it may be worth asking yourself how you could be more tax-efficient in 2012. Your mortgage can, in some circumstances, “be used to produce a type of tax-free income”, says Nick Braun in Business Tax Saver.
The point to remember is that “not paying interest is always much better than earning it”. For example, if paying off £10,000 of debt means you don’t have to pay 5% interest on it, you have effectively earned £500 tax-free. That’s much better than earning 0.5% after tax on your savings.
If you still want access to your cash, an offset mortgage may be for you. This means the bank stops paying you interest on your savings and charges you less interest on your mortgage.
Take Jean, who has £30,000 in a business bank account earning 1.5% a year. After paying 40% tax, she is left with £270. With an offset mortgage, that “£30,000 business cash would be subtracted from her mortgage balance”. If the mortgage rate is 3.75% this will save her £1,125 a year. Thus she is £855 a year better off with the offset (£1,125 - £270).