In an era of high inflation and taxation, consumers are increasingly looking for tax-efficient ways to save money and make their financial products work harder for them. Borrowers expect their financial adviser to consider their mortgage in the wider context of their overall finances, to ensure that they have the most cost-effective combination of financial products for their current circumstances and future needs.
Offset mortgages are perhaps not commonly thought of as the secret weapon against taxation and inflation, but to homeowners – and advisers – that is exactly what they can represent. Benefits such as tax efficiency, the opportunity to pay less interest on borrowings and the potential for long-term financial planning are just some of the attributes. Most mortgage borrowers have savings and for many, using this money to cancel out some of their mortgage debt makes sense. And because offset mortgage lenders calculate interest daily, every pound on deposit works hard to reduce the cost of borrowing.
Going back to basics, most offset mortgages work by setting the money otherwise held in savings accounts, and sometimes a current account, against the amount outstanding on a mortgage. Instead of the homeowner earning interest on their savings, the money effectively erodes the size of their overall mortgage, so they pay less interest. Rather than earning money, they save it.
The current financial climate can be quite daunting for those trying to make their money stretch, or striving to save for the future. This is a problem facing all consumers, but the pressure is particularly on high earners to boost their savings to negate the effects of having to pay a higher rate of tax. Many such higher-rate taxpayers see 40 per cent of any interest on savings accounts swallowed in tax, so an offset provides a solution: because no interest is paid on accounts linked to an offset, there is no tax to pay.
For consumers in all earning brackets, offsetting can genuinely be the perfect inflation busting solution and offers the chance to save money. For example, offsetting £100,000 in savings against a standard variable rate mortgage of £350,000, would save £266,793 in overall interest and reduce the mortgage term by almost nine years.
In the past, rates on offset products were higher than on standard mortgages, making offsetting a viable option only for people with sizeable savings. But as the mortgage market has become increasingly competitive, rates have gone down and the difference between offsets and standard mortgage products is now much less. Today, consumers will only pay a small premium for an offset product as opposed to a fixed-rate mortgage and for those who take advantage of the offset, the benefits will often outweigh the costs.
We know that control is an integral ingredient in what consumers want from their financial products: to feel in control and to be able to take control. Offset mortgages – the ultimate flexible product – give the borrower the ability to potentially shorten their mortgage term or reduce monthly payments, which can mean they avoid the hassle of re-mortgaging to chase rates. In addition, money deposited through offsetting is not tied in. Should the homeowners’ circumstances change, they can have easy, immediate access to funds, allowing them peace of mind.
Offset mortgages are best suited to those looking for stability and a long-term package, but within these criteria their appeal is becoming increasingly broad – from the self-employed to first-time buyers. Advisers with self-employed clients can discuss the advantages of saving over the year to pay their tax bill in April, while enjoying the benefits of offsetting this tax-free lump sum against their mortgage. They can also take advantage of the other flexible offset features offered by select providers such as fee-free under- and overpayments, which makes sense for anyone whose income varies each month.
But with so many offset products entering the market, IFAs and brokers can offer a key role in identifying the most suitable provider. After all, clients will be entrusting a large portion of their finances to one lender, so it’s important to get it right. For advisers, there is also value to be offered in explaining and evaluating these products against traditional mortgages. Clients that gain most value from offsetting are those who take a strategic, long-term approach. Professional advice can help these clients to turn their offset mortgage into a financial and even life-management tool. It can also open up opportunities to review the client’s finances as a whole.
Flexible and offset mortgages provide a genuine opportunity for an adviser to get a foot in the door, and while they are excellent for long-term profitability, they are not suitable for all mortgagees. The options of overpaying, underpaying or even taking a payment holiday means that flexible mortgages should appeal to those with similarly flexible lifestyles and incomes. However, the main beneficiaries of offsetting are those financially savvy clients with savings who will be drawn to a tailored product that allows them to pay off a mortgage early and approach retirement in control of their finances, with security and extra cash in their pockets.
By advising high net worth clients of the savings that can be made through offsetting, advisers can add value, maintain dialogue and potentially sell more products in the future. With a high level of financial awareness, a desire to shop around for financial products and a proven saving track record, individuals who choose to offset are the type of clients with whom advisers can develop an ongoing relationship.
In a time where long-lived client relationships are key, research has found that nearly two-thirds of IFAs believe that providing advice on the best use of flexible features could improve client relationships. Offsetting is a core flexible feature that needs to be front of mind for consumers and advisers looking for ways to make money go further and work harder.
- Offset mortgages can be thought of as the secret weapon against taxation and inflation
- Offset mortgages give the borrower the ability to potentially shorten their mortgage term or reduce monthly payments
- By advising high net worth clients of the savings that can be made through offsetting, advisers can add value, maintain dialogue and potentially sell more products in the future
- Offset mortgages can make money go further and work harder for increasing numbers of borrowers