Contractors ignoring offset mortgages could be overpaying £1,000s in needless interest. Recent research, reviewed here, highlights the scale of missed opportunity.
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Right now, we have an unprecedented number of contractor-friendly lenders accessible through us. Over the last eighteen months, we’ve added more lenders pro rata than at any other time. There are more to come, too.
One service that the newer lenders are helping us to provide is access to offset mortgages.
Moreover, they’re missing the opportunity to save thousands of pounds.
Little bits at first. But then, as they add more to their savings, the mortgage balance reduces further.
Each month there’s a more positive balance, there’s a more negative balance. If you know what I mean.
We’re not talking saving over the life of the mortgage alone. We mean saving by cutting down on the amount of mortgage upon which contractors pay interest from Day 1.
We can also help contractors own their home much sooner. Our clients could cut months, even years, off their mortgage term using an offset product.
Or, if you’re closer to retirement, help reduce future mortgage repayments.
How? By offsetting your savings* against your mortgage balance. Contractors are amongst the best positioned to take advantage of this method. So why aren’t they?
Offset mortgages for contractors are no different than for anyone else. The underwriting and approach may differ. But they are, in essence, simple. Your mortgage balance – your savings* = the amount upon which you pay interest.
Our definition in 50 words or less:
Offset mortgages let borrowers link their savings account(s) to their mortgage account.
Those savings don't pay off any of the mortgage. The lender "offsets" them against the borrower's mortgage balance.
The borrower will only pay interest on the difference:
mortgage balance - total linked savings = mortgage balance subject to interest.
The research into offset mortgages by Accord indicated a different consumer perception. The responses of brokers who helped with the research say it all:
The Yorkshire Building Society Group identified a similar pattern in its research.
The self-employed community showed a lack of awareness and understanding of offset mortgages. 29% admitted total ignorance of the way this type of home loan works.
Yet this is one of the key groups whom offset’s flexibility and tax advantages could benefit.
That said, within the group, the research highlighted clear differences in perception. Veteran contractors did report some knowledge of this type of home loan.
Compare that to those newest to contracting who’d heard of this type of borrowing. Where they’d gone to get offset mortgages explained to them is anyone’s guess. But they’d dreamt up many misconceptions.
Some believed they’d lose access to their savings, as if they were sacrificing that money. Others didn’t realise they could reduce their mortgage term or monthly repayments.
One explanation may be the recent economic climate. Since the FCA introduced Responsible Lending guidelines, lenders have exercised caution.
“Risk” has underlined everything in the mortgage process, from credit score to deposits. Since exiting lockdown, it even underpins how lenders view the industry you work in.
Our newer partners have included contractor offset mortgages from the outset. Scottish Widows, Accord and Clydesdale all now offer a variation of this type of lending.
Through them, we can offer a golden opportunity to contractors earning >£350/day. The potential savings by offsetting are huge. Our job now is to help contractors leverage their savings to find the best offset option.
What if I have more than one account? A standard saver and an ISA, say? Can I link both to my offset mortgage account?
Some of our lenders, Accord being one, let up to three savings accounts offset their mortgage.
This is perfect for limited company contractors who have a current account and an ISA. Since the £5k cap on tax-free dividends, many draw-down dividends into ISAs.
Over time, imagine a contractor has an ISA, a current account and a savings account. They can use the cash in all three to reduce the balance upon which they pay interest.
For round figures, imagine a contractor has a small mortgage balance of £65,000. The three offsetting accounts each have £15k in them, so £45,000 in total savings.
Thus, the difference between their mortgage balance and total savings is £20,000. With an offset mortgage, the contractor only pays interest on that £20k difference.
Some mortgage lenders also allow you to switch between the type of offset mortgage you’ve taken out. They recognise that borrowers circumstances do change over a mortgage term.
You can offset your savings against your mortgage balance in three ways. That means homeowner savers can reduce either their:
At the outset, you may want to reduce your current mortgage repayments to free up more income. But as your savings grow, reducing future payments or the life of your mortgage may suit you better.
Offset mortgages are a great way to save money, offering a flexible alternative. They can either help you reduce your monthly payments. Or they can shorten the term and help you get mortgage-free sooner.
But so many contractors don’t understand them. Some don’t even know they exist, which is a crying shame!
Contractors dismissing offset mortgages could be missing out on £1,000s in savings. And if we know anything about them, saving money is one aspect they won’t pass up.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.