Luther Yeates, head of mortgages at Orton Financial, has said cash ISA reforms could have unintended consequences, as if benefits are restricted, people will “likely start looking for more tax-efficient ways to use their cash savings”.
Offset mortgages allow you to lower the amount of interest you pay by offsetting savings against your mortgage balance. The amount you pay is your mortgage balance minus the amount in savings.
Yeates said not everyone was comfortable with investing in stocks and shares, so savers could turn to “offset mortgages as an alternative”.
“Offset mortgages were more common in the past, but only a narrow range of lenders offer them today. However, these products could become far more attractive again if the ISA changes go ahead. This could completely reshape the mortgage market,” he said.
According to Criteria Brain, there are only four lenders who currently offer residential offset mortgages and two who offer them for buy to let (BTL).
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Yeates explained that many people may simply choose to offset their mortgages instead of putting money into stocks and shares ISAs.
For example, if you have a £200,000 mortgage and £50,000 in linked savings, a borrower will only pay interest on £150,000 of the mortgage balance.
“Unlike earning interest in an ISA, where returns are tax-free up to your allowance, offsetting savings against a mortgage reduces your interest payments rather than earning interest. This benefit isn’t taxed, so it effectively gives people a tax-efficient return on their savings without taking on investment risk.
“I recently quoted an offset mortgage for a barrister who keeps their income tax and VAT savings in their offset account. This gives them a real material benefit because if those savings were earning interest in a standard account, it would be taxed at 40%, and eventually 45% as their income rises. By offsetting their mortgage instead, they’re not taxed in the same way, so they keep more of their money working for them,” he said.
Yeates said if the Government restricts cash ISAs, lenders could see more demand for offset mortgages, and while there are only a few deals available at the moment, these deals could “quickly return to the mainstream”.
“This means lenders have to work harder to provide competitive deals and potentially bring new offset products back to market to remain attractive,” he said.
Media reports are circulating that Chancellor Rachel Reeves is considering lowering the cash ISA limit to less than £20,000 later this month.
The move has been criticised by the industry, members of which say it could make mortgages more expensive and negatively impact low-income savers.
This article was first published on YourMoney.com‘s sister site, Mortgage Solutions. Read: Cash ISA reforms could lead to rise in offset mortgages
