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Case study: When offsets are a saving grace

by: Islay Robinson, CEO, Enness Private Clients
  • 30/09/2016
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Mortgage adviser Islay Robinson explains that the offset savings vehicle gave his client back the luxury of time so he didn't have to rush into a second home purchase in London.

Getting the best return from your savings can be difficult, especially for higher rate tax payers whose savings are usually taxed as income. Because of this, an offset mortgage can be a great way of utilizing your savings to the fullest, by either reducing your mortgage term or the interest you pay.

The best thing about an offset mortgage is the flexibility it provides, especially if you’re borrowing money that you don’t need to use immediately. Only recently we arranged a million-pound mortgage for a client who wanted to buy a pied à terre in London – but had no immediate need for the money. He was looking to borrow £1 million but wanted to ensure the finance was all in place before beginning his search in earnest.

Mark was a banker who worked in the City and had recently taken an extended sabbatical from work. He lived with his wife Rachael in Hampshire, but wanted to purchase a property in London to use mid-week while working – saving the long commute. Of course, this would not come cheap, so he needed to raise £1 million on his current property in order to make the purchase.

As he was actively in the market, Mark wanted the cash at his disposal so he could be a cash buyer and benefit from a quicker process and purchase. Understandably, he didn’t want to pay interest on the funds until he needed to use them. We also needed a lender who wouldn’t require a simultaneous purchase, due to the fact that he hadn’t yet identified a property.

An offset is always a separate savings account to your mortgage but still links the two, with no interest paid on the savings aspect. This provides the borrower with the benefit of a lower effective interest rate on the mortgage balance – offset by the balance sitting in the savings account – thus saving on the interest and tax you would usually pay. For mortgages on a repayment basis, utilizing the offset pays towards the capital rather than the interest, so although he wouldn’t earn any extra interest, this would cost Mark much less long-term with the freedom to pay off the mortgage sooner and reduce the cost of borrowing.

We managed to speak to the lender whom we have an excellent relationship with, who was willing to proceed despite Mark’s income irregularities and having no property in mind.

Initially, my client provided a value for their existing property of £2m, which would result in 50% loan-to-value (LTV) when borrowing £1m. However, after the lender’s valuation of £1.7m, the maximum amount of borrowing on interest only available was £850,000, so I needed to find an effective way of restructuring the loan.

We secured an offset product that meant he was able to put the money into a linked account, which he could then effectively sit on, paying no interest until he needed to use it. This resulted in a mortgage at 50% loan to value (LTV) on an interest-only basis, which amounted to £850,000, with a further £150,000 arranged on a repayment basis to ensure the loan still came to a total of £1m.

My client was thus able to complete on the £1m loan, which was fixed at 1.99% above the Bank of England base rate for the term of the mortgage – meaning an initial rate of 2.49%*. This was an excellent result for my client, of which he was delighted and proceeded to recommend to his friends.

*Bank of England base rate at the time of completion, before the reduction to 0.25%.


Click on the link below to return to the offset learning hub, in association with Scottish Widows Bank.


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