Tax efficient mortgages for contractors
Savvy contractors have long linked their savings to their mortgage using a tax efficient mortgage product called an offset.
An offset mortgage offers borrowers a conventional mortgage with a linked savings account, where funds can be regularly deposited or withdrawn without notice. The lender takes account of the savings balance held in this account, deducting this from the mortgage debt, before calculating the monthly interest due.
As an example, a contractor with a £330,000 mortgage and £50,000 in their savings account will only pay interest on the difference between the two, £280,000 – a far smaller balance. Crucially, because no interest is payable on the savings you keep in the offset account, the benefits are not taxable, making this an extremely tax efficient way to manage your savings.
The savings in interest can be significant, particularly when you consider your mortgage is your largest and longest term debt.
Using the example above, over a 25-year mortgage term a contractor could save over £62,000 in interest when compared to a traditional mortgage product*, and assuming the savings are used to reduce the mortgage debt further, could find themselves mortgage free 5 years earlier than expected.
*Based on a comparison between a Scottish Widows 2 year fixed rate offset mortgage at 1.4% with a £1,499 arrangement fee and a Halifax 2 year fixed rate non offset mortgage at 1.34% with a £999 arrangement fee.