Exclusive Offset mortgage scheme open to ContractorUK readers
Since the credit crunch struck, wholesale mortgage funding on the money markets has been virtually impossible for lenders to secure. Mortgage companies have scaled back special offers and instead now use uncompetitive pricing as a means of restricting lending to within levels that they can realistically self-fund from traditional savings deposits.
Given the general financial climate we are pleased to have been able to build on the contract based income underwriting that we use for ContractorUK clients. In particular we are proud to have access to a number of offset mortgage schemes that are of particular use to Contractors in the current financial climate as they allow you to pay more or less off of your mortgage depending on your disposable income levels at the time.
The benefits of Offset mortgages aren't always fully understood and Contractors are in an ideal position to exploit the flexibility whilst potentially cutting their tax bills in the process.
When Offset mortgages first appeared in the UK they were sometimes referred to as Australian mortgages because of their popularity down-under. Just like Australia's barby and beach culture, these mortgage schemes arrived as a welcome breath of fresh air compared to the stiff conformity of traditional British loans.
Your mortgage at the heart of your finances.
Many of our clients will want to take a break from mortgage payments, for instance when they are between contracts for whatever reason. They simply notify the mortgage company that they wish to roll up the next few months payments and we even have a client who avidly follows English cricket around the world and was in New Zealand for the best part of February and March. Whilst he enjoyed the sun and some good cricket, his mortgage lender was blissfully unaware.
He times his contract dates to coincide with tours and doesn't have to worry about the bills whilst he's away because everything's taken care of. The next 2 months mortgage payments were rolled up and he simply overpays when has to come back to the real world and restarts his Contract. In this way, over the course of the year he's still made the same dent in the outstanding mortgage whilst still having some cash left over to get himself back into his girlfriend's good books.
Other clients will use the payment holidays or underpayments to help whilst training or maybe even to soften the impact of any downturn in Contract rate or availability of work such as we experienced in 2001/2002 and 2008/9.
What is Offsetting?
Offset mortgages are a hybrid flexible mortgage which will allow you to use the balance of linked savings and current accounts to reduce what you pay in interest on your mortgage. On a daily basis the total of these credit balances is swept across your mortgage debt and you only pay interest on the balance between the two.
We really like these schemes for contractors because, by definition, you will have variable amounts of money on hand throughout the year but may not want to lock it away by formally paying off a lump sum from your mortgage balance.
Instead you can still benefit from the reduction in mortgage interest by holding money in the instantly accessible cheque-book or savings account that has been linked to your mortgage.
With a Offset you don't have to transfer your current account to the mortgage company unless you want to but if you do the benefits could be even greater given the fact that you'll save interest on your mortgage on the very same day that your income is credited to the account from your Limited Company or Umbrella.
Any lump sum savings that you currently have set aside for a rainy day, any dividends that you draw out of a Limited Company, tax funds that you hold or even cash for household bills and holidays, these can all be put to good use instead of gathering dust in poor performing accounts elsewhere. Hold them alongside your mortgage instead and the rate of return will undoubtedly be much greater as instead of earning a paltry savings interest rate you'll be avoiding what will almost always be a higher rate of mortgage interest.
There's even good news on the tax front too!
In a post income sharing, MSC and IR35 world there are few scraps of good news left around for us in terms of tax planning. Offsetting against your mortgage can have unexpected tax benefits and can help deprive HMRC of any more of your hard earned cash.
You would be far better off keeping savings in your Offset than a traditional savings account. Interest that you earn on savings will invariably suffer a minimum 20% tax hit. With offset funds, instead of earning interest which is classed in the same way as income you would be avoiding interest on debt and there would be no tax due. A higher rate taxpayer would benefit 'tax free' from the saving in interest, representing an equivalent 'return' of 10%.
In this way it can be far more efficient a use of any cash you hold and my Investment colleagues at ContractorMoney can testify that a 10% risk and charges free return compares very favourably indeed with any other alternative investment that you could make.
If you have a Limited Company it may also be possible to offset a limited amount of Company money too, subject to approval from your accountant.
No more remortgaging
Offsets are likely to be competitive lifetime base rate trackers so not only do you avoid the need to shop around again when a short term fixed or discounted rate expires but you also avoid an increasingly frustrating feature of the mortgage market whereby lenders are not passing on the full impact of any reduction in Bank of England rates to customers. With a base rate tracker the lender has no option but to pass on the full saving.
Remortgaging to an Offset is simple using the contract based underwriting that we have negotiated with many of the main providers and the new lender will sometimes help towards any admin costs.
We can even use this opportunity to build in a facility for you to draw down equity in your house if ever required in the future, safe in the knowledge that you won't pay a penny for this money until or unless you actually need it. Any eventual drawdown will also be charged at mortgage interest rates which could be far less expensive than personal loans or credit card rates.
Offsets are nearly always free of long term tie ins so you could give a scheme a go for a number of years to see whether you do make full use of the flexibility but you won't be locked in forever. From our experience it's likely that you'll learn to love the freedom and so the scheme will last for the full term of the mortgage.
Each year we help many hundreds of Contractors exploit the great benefits of Offset schemes. Flexible working is truly complimented by a flexible mortgage.
Request a quote or more information from Contractor Money here.
The value of investments may fall as well as rise and past performance is not a guide to future returns.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Financial advice is given by ContractorMoney, which is a trading name of Contractor Financials Ltd and is regulated and authorised by the Financial Conduct Authority.