Dental Specialist Financial Adviser, Lloyd Boston, shares how offset mortgages can be beneficial to dentists when interest rates are high.
Over the past few months, I have been contacted by several clients with concerns regarding their mortgage rates. The cost-of-living crisis has meant that many of us have been feeling the pinch, and recent high mortgage rates have only added to the issue.
Although mortgage rates are starting to come down, which is good news for anyone looking to remortgage, I often find that when it comes to first-time buyers or dentists looking to remortgage, many of my clients are not getting the right advice or deal for them.
It can be more challenging for dentists to get the best deal on a mortgage, due to their self-employed status and the often complex nature of their incomes. As a result, lenders can find it harder to understand their income patterns and to form a prediction of future income.
Dental Specialist Financial Advisers not only have whole of the market access to lenders, but can also form a comprehensive overview of the dentists' finances to determine the most efficient and effective approach. There are all sorts of options that people may not be aware of, making it important to be well-informed before making such decisions.
When I talk to dentists about mortgages, I see a general trend where they may get a couple of quotes from high street or online lenders, then opt for whichever is best and feel satisfied that they are on a decent rate.
They may well indeed be on a reasonable rate, but they could have perhaps gotten an even better rate by using an offset mortgage, or a two-year rate versus a five-year rate, depending on what their objectives were and their circumstances. This is where it is useful to have specialist input from an adviser, who will gain a detailed understanding of individual circumstances and what would be most beneficial for them as a dentist.
In some cases, there is a significant difference in interest rates between one bank and another - as great as 4% between their best and the worst deals.
What is an offset mortgage?
Depending on the client’s situation, it may be worthwhile to offset their mortgage. This can provide a smart way to minimise the interest paid over the term of the loan.
An offset mortgage essentially allows borrowers to link their current and savings accounts to their mortgage. The savings are paid into a special savings account – an offset account – and once it is paid in, the savings won’t earn any interest.
Instead, the amount of money in the savings account will affect how much interest is paid on the mortgage. Therefore, the more that is in the savings account, the lower the amount of interest payable on the mortgage. For example, let’s imagine a dentist with a mortgage of £200,000 and a savings account of £20,000. If they were to offset their savings account against their mortgage, they would only pay interest on £180,000, instead of the full £200,000. This means a 10% saving on the amount of interest you would pay back on the mortgage.
Offsetting is available for fixed-rate mortgages and variable-rate mortgages. It can help you reduce your monthly payments, and because there is no interest earned on the savings account, it is not taxable.
How can an offset mortgage be beneficial?
For associate dentists, an offset mortgage may be beneficial. Many associates have to save throughout the year to pay their tax bill twice a year. This is approximately 30% of their income, which for many will equate to more than 10% of their mortgage balance. This could therefore potentially help to lower the interest rates paid on the mortgage - depending on the product provider.
For example, if an associate dentist had a £200,000 mortgage and £20,000 in an offset account, they could potentially save more money by using an offset account - rather than taking out the cheapest mortgage product.
I recently went through this process with a dentist and calculated how much they would save in the offset account versus how much they would save by taking out a mortgage product that was at the lowest rate available at the time. By keeping the money in the offset account, I was able to demonstrate to the client that they could save approximately £1000 per year on interest.
To offer another example, I had a client couple with a larger bank balance of approximately £350,000 and a mortgage of £320,000. They didn’t want to pay off their mortgage with their savings as they were considering the idea of opening a dental practice at some point in the future and wanted to keep their money somewhere easily accessible.
They had not, however, considered an offset mortgage. By putting £320,000 of their savings into an offset savings account, they effectively didn’t pay any interest. Everything they paid was capital. This meant that while they had their money in the offset account, their payments were effectively at a 0% interest rate. They were also able to retain access to their money, as an offset account can be accessed at any time and some providers offer the option of linking the account to debit cards.
Depending on how much is in your savings account, offsetting can effectively reduce how much tax you pay - especially for higher rate payers who ordinarily would pay 40% tax on any savings interest received that is above £500. Using an offset savings account means that as no interest is gained, and that the higher rate tax paying dentist would benefit from the interest they did not pay. This could amount to thousands of pounds saved in tax alone for the average dentist.
Seeking specialist advice
When I am working with dentists who need help with mortgages, I always talk through all the potential options. This includes explaining how an offset mortgage works, to find the most suitable solution for their specific circumstances.
I would stress that seeking the support of a Dental Specialist Financial Adviser can be highly beneficial for dentists looking to take out a mortgage or to remortgage, as we understand the progression of a dentist’s career path and have access to whole of market lenders. We can also help lenders to understand the income patterns of a dentist, to ultimately help get the best deal for our clients.
Your mortgage is secured on your home. Your home may be repossessed if you do not keep up repayments on your mortgage. Wesleyan Financial Services is a broker and will be paid a fee upon completion of the loan.
Tax treatment depends on individual circumstances and may be subject to change in future.