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Changing work patterns mean changing mortgage requirements – Fleming

by: Martin Fleming, managing director of Scottish Widows Bank
  • 28/09/2017
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Changing work patterns mean changing mortgage requirements – Fleming
There are fundamental shifts taking place in the UK’s workforce demographics.

Over the past two years, the number of self-employed workers has risen to almost five million, and since 2008 almost 40% of employment growth has come from the self-employed or small business owners.

Even the face of self-employment is changing, concentrating on higher-skilled occupational groups in business and finance.

With an aging population that continues to work and a younger generation driving a gig economy where a regular monthly salary is no longer the norm, the fabric of the UK’s workforce is transforming.

 

Solid proposition

For these demographics, an offset mortgage is a solid proposition for advisers to consider because it makes good use of tax and lump sums, especially in a low interest rate environment.

For the self-employed, regular bonus earners, those with high savings and entrepreneurs where managing cashflow is important, offsetting could make the most financial sense.

Although more people are steadily turning to the benefits offered by an offset mortgage, it only makes up less than 5% of the mortgage market in the UK.

In Australia, where many advisers specialise in offset, 37% of mortgages use the facility, highlighting a huge opportunity for advisers here if they can help clients to understand the benefits.

 

Savings increase

We’re seeing a significant increase in the amount of savings people are offsetting in a tax-efficient, flexible way.

Over the last year we have typically seen offset balances from remortgages increase to around 20% of the mortgage balance.

For self-employed clients in particular who need to save towards their annual tax bill, linking savings to an offset mortgage means their money is working efficiently by offsetting the interest on their mortgage every month.

There are more offset providers in the market and less risk to adviser income as clients benefiting from offset can more easily move to another offset mortgage product.

 

Tax-free

With offset, the savings clients make are 100% tax-free, even if they are a higher rate or an additional rate taxpayer. By advising a client to have a mortgage with an offset facility linked to their savings, instead of earning interest on their savings, they’ll pay less interest on their mortgage or reduce the term.

Research highlights that younger customers on a capital and repayment mortgage have a main aim of paying off their mortgage as quickly as possible, with a reduced term the preferred option. However, older customers with a suitable repayment vehicle such as sale of mortgaged property, opt for reduced monthly payments – increasing their monthly disposable income.

As part of offering good quality, valuable advice, offset should be part of the discussion. If advisers are not asking their clients how much disposable income and savings they have and asking them if they want to pay off their mortgage by offsetting it, they should be.

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