In an article in the Glasgow Herald this week, Principal Adviser at Glasgow Wealth, Michael Garvey, was again discussing Investments, Savings and Financial Advice. On the table this week is Mortgage Advice – and the benefits of the ‘Offset Mortgage‘.
The Bank of England recently publicised that 15.75% of new mortgage applications in the first quarter of 2017 were secured over a 35-year term, indicating that new borrowers are happy to take on a lifetime of debt in order to secure property ownership. At the moment, debt is cheap (renting… not so much!) and – despite tighter regulations – remains relatively easy to obtain.
However, as financial advisers, our primary concern is with growing and protecting our clients’ net worth; that is, their assets, less their liabilities. Borrowing over such a long period of time is usually inhibitive in the context of financial planning with the opportunity cost usually being the ability to save meaningfully for retirement. The humble offset mortgage could however provide a medium-term pathway to solvency for borrowers who find themselves in this situation.
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Essentially, an offset mortgage bolts-on a savings account to the mortgage debt and usually any funds added to the savings account will have the effect of reducing the monthly payment or (perhaps more prudently) reducing the term of the loan. So, should the borrower(s) salary increase or if capital otherwise becomes available during the life of the loan, funds can be immediately used to shorten the mortgage term.
With interest rates as they are, it usually makes sense to fix a mortgage rate for the medium term. Traditionally, this has delivered a layer of inflexibility in respect of being able to reduce the term during the fixed period of the loan should capital or income become available to pay down the loan. Thus, the use of an offset facility is perhaps the most potent tool available for those in the early stages of mortgage debt.
By nature, offset mortgages have usually been variable rate deals. However, in recent years a number of more innovative lenders have come to market with products that combine competitively-priced fixed rate deals with the flexibility of an offset account; delivering the best of both worlds. The funds in the offset account remain available should capital be required as would be the case with a regular savings account, providing maximum flexibility. In effect, savings or disposable income used in this way to offset a mortgage liability attract a tax-free marginal rate of interest equivalent to the prevailing mortgage rate. Thus, the ability of the banking model to create profit from taking deposits at one rate and lending at a higher rate is turned on its head and used to the borrower’s advantage.
For specific Mortgage Advice or to discuss your Pensions, Savings or Investments, Contact us at Glasgow Wealth Limited, George Square, Glasgow, G2 1EG, 0141 328 3916. Or email us at: firstname.lastname@example.org