Interest-only offset mortgage comparison
An interest-only mortgage with an offset account can give you greater control of your debt, with a bit of planning.
Adding an offset account to an interest-only mortgage can give you greater control over your mortgage debt while freeing up funds for investment, but you also need to plan ahead for how you’ll pay off the balance at the end of the term.
How do interest-only mortgages with offset accounts work?
For example, let’s say you have a £250,000 mortgage with £10,000 sitting in an offset account. Instead of being charged interest on £250,000, your interest would be calculated on £240,000.
Adding the interest-only feature to this means you can significantly reduce your repayments. If you’re only paying interest and the interest you’re being charged is reduced by the funds in the offset account, you’ll end up with a substantially lower mortgage payment.
However, it’s important to remember that during the interest-only period, you won’t be reducing your debt. Because you won’t be making payments on the amount you originally borrowed, you’ll end the term owing the same amount and you’ll need to have a way of repaying it.
Why would I use an interest-only mortgage with an offset account?
If you’re a property investor, you can deduct your mortgage interest payments from your tax. By taking an interest-only mortgage, you could ensure that your entire mortgage repayment is deductible. However, the rules on that are changing.
Changes to UK mortgage interest tax relief
In April 2017, the tax rules for deducting mortgage interest from rental income changed as the government is phasing out this deduction. By April 2020, you will not be able to deduct the interest you pay in your investment mortgage from your tax. Here’s the timetable for the changes.
|Tax year||Percentage of mortgage interest costs deductible from rental income|
But interest-only mortgages with offset accounts aren’t just for investors. Owner-occupiers can use the loans. Rather than making a full debt and interest repayment, as an owner-occupier you can pay the interest and if you have savings, you can use them to offset the amount you pay interest on. However, you won’t earn any interest on the savings in the offset account. At the end of your term, you need to have planned how you’ll repay the balance. Some people do this through investing, or by selling the property – both of which carry some risk that you can end up with less than you need for repaying the debt.
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