What Rising Mortgage Rates Could Mean for You
As a business Mesa Financial advises on mortgages throughout London and Surrey.
Over the last few weeks, we have seen a significant increase in mortgage rates offered by banks.
The ‘mini budget’ given by the government caused a huge reaction by the markets in fear that there were plans to print more money.
This caused the SWAP rates to jump dramatically which in turn forced lenders to make significant increases in their mortgage pricing or in some instances stop lending altogether whilst the situation stabilises.
What can you do?
Over the next few years, there will be many mortgage holders finishing their fixed rate terms and seeing a significant increase in their monthly mortgage costs.
There are estimated to be around 2 million homeowners coming off their fixed-rate deals in 2023.
Francisco Mesa Baya, Director
Equally, during the pandemic there has been a general increase in the average savings per household.
Unfortunately, the increase in interest rates still has not been transferred to savings accounts and the return in instant access savings is still very poor, particularly for high tax rate payers.
For example, as a higher rate taxpayer if you have £200,000 in savings and are receiving 0.5% per annum this will provide a total annual return of £1,000 of which £400 / £450 will have to be paid in taxes.
There may be ways of using savings more efficiently to reduce the impact of mortgage rate increases...
Option 1- Reduce your mortgage with your savings
It may not make sense to keep money in a savings account if you are only earning a small amount whilst paying a huge amount on your mortgage.
The issue with this option is that it ties up most of your cash holdings into a single liquid asset.
Option 2 – Keep paying your mortgage
But invest the savings elsewhere to try to offset costs however, to get any sensible returns you would probably have to fix the money and remember you would still be taxed on any interest.
As we have seen with the example above, as a higher-rate taxpayer you only receive around 60% of the gross interest.
Option 3 – Consider an offset mortgage
This allows you to use your savings balances to reduce the amount of interest you pay on your mortgage as you would only pay interest on the difference between your mortgage balance and your savings balance.
For instance, if your mortgage is £500,000 and your savings equal £250,000, you would only pay interest on the difference, £250,000.
EXAMPLE OF SAVINGS OFFSET VS SAVINGS IN FIXED BOND ACCOUNT
- Mortgage balance £1,000,000.00
- Savings balance £500,000.00
- Mortgage rate – 5-year fixed offset 5%
Having £500,000 offset against your mortgage would essentially save you £25,000 per year in interest costs.
If the savings were invested at a rate of 3% you would receive £15,000 per annum but as a higher rate taxpayer, you would also be taxed 40%, leaving a net position of £9,000 per annum.
The Mesa Financial Service
There can be extreme complexities to consider when looking at financial positions and it is key to get the correct advice based on your individual circumstances.
If you are looking for a local trusted adviser, please reach out to one of their team.
There are advantages of an offset mortgage:
- It could provide significant reductions in the interest paid overall on your mortgage. The higher the amount of savings you have the higher the saving that is made.
- It provides a tax-efficient way of getting a return on savings. Since you would not get interest on your savings there would not be a tax liability.
- It provides mortgagors with a more flexible way of managing how the mortgage is paid during the term of the mortgage. With offset mortgages, the interest saved can be used to either pay the mortgage faster or to reduce monthly commitments.
- It reduces the impact of rate increases on monthly commitments. For instance, if your savings balances equal your mortgage, you would effectively have a mortgage at 0% and therefore you would be unaffected by any rate increases.
- Savings held on an offset mortgage can be accessed anytime and therefore it provides additional flexibility.
- Larger capital repayments may be able to be made without penalties, unlike traditional mortgages.
- In certain circumstances, it may reduce the need for re-mortgaging every few years which reduces the overall costs of having a mortgage over a long period of time.
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