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Gold, incentives and meh

Using tax savings to pay off your mortgage early

Financial advisor Shane Stack gives advice on something we all dream of doing

Financial advisor Shane Stack gives advice on something we all dream of doing

The majority of GPs are self employed and hence have to pay their tax in two six monthly instalments (January and July).

In my experience, the majority let the practice pay them net and hence the practice saves for their tax bill.

Although this makes it easier for the individual, often the interest earned on these practice savings accounts are minimal. Yet you are still taxed at your highest rate, which is typically 40 per cent.

By getting the practice to pay you gross you can save for your own tax bill.

For an individual earning £100,000 per annum, they would need to save approx 30 per cent of all drawings, but you should get your accountant to advise on the amount you need to set aside.

You then either simply save this in a high interest instant access savings account where you can earn around 6.4 per cent gross currently (source Moneyfacts August 2008).

For higher rate tax payers this equates to 3.84 per cent net so if you have a basic or non tax paying spouse or civil partner consider saving in their name.

Alternatively, if you have a mortgage, consider an offset style mortgage, as this is one of the best ways of getting the most from your savings.

As you do not physically receive the interest on these savings, you therefore do not have to pay tax on interest under current legislation.

You can either go for the all encompassing current account type of arrangement offered by the likes of The One account, first direct and the Woolwich for example.

You simply pay interest on the daily balance.

Check interest rates

However, you should check carefully the interest rates on these accounts as they can vary considerably.

For example, The One account are currently charging a rate of 6.7 per cent regardless of loan to value, whereas Woolwich will only charge 6.09 per cent if the loan to value is 60 per cent or less.

First direct are charging 5.99 per cent currently (max loan to value for first direct is 80 per cent).

Woolwich charge an application fee of £995, whereas The One account doesn't charge an application fee.

Both will also charge valuation fees and solicitor's fees.

First direct currently doesn't have any remortgaging fees and will do the conveyancing for free.

Sometimes it can be confusing to know how much you actually owe on current account type arrangements, and if you are saving for your tax bill for example, you might find it difficult to identify the money specifically set aside.

As an alternative you can simply have a purely savings type of offset arrangement, which most lenders are offering.

This is a separate account which runs alongside your main mortgage and typically you are charged interest on the total balance outstanding, net of savings.

Again rates will vary between lenders, and a few, including Scottish Widows Bank, and first direct will offer offsetting on a fixed rate mortgage.


OK, let us look at some examples.

Take an individual with a property valued at £375,000 with a 20 year to run £300,000 repayment mortgage with Scottish Widows Bank, on their lifetime base rate tracker of 1.39 per cent above base (current rate 6.39 per cent).

We will assume the individual earns £100,000 per annum and begins to save £2,500 per month in the offset deposit account and withdraws £15,000 every January and July to pay their tax bill.

According to the Scottish Widows Bank Offset Calculator this will save £15,430.94 in interest over the remaining term of the loan - i.e. the loan will be repaid six months earlier.

Let us say the individual wishes to overpay the mortgage by £200 per month in addition. The combined effect will then be to reduce the amount of interest by £51,710.06 - i.e. the loan will be repaid three years five months early.

Alternatively, instead of keeping a rainy day fund in the bank/building society, if they combined the regular tax saving with a lump sum deposit in the offset account of, say, £20,000 this will save £58,520.06 in interest and reduce the mortgage by two years two months.

So as you can see, by simply utilising your savings in a more efficient manner you can reduce the amount of interest you pay and thus reduce the term of your mortgage.

Shane Stack is a partner at Medical Money Management, specialist Independent Financial Advisors to the Medical Profession and a Director of Medical Money Management (GIB) Ltd

Using tax changes to pay your mortage off early

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