These are tough times for those of us who want to be in cash. With the Retail Price Index (RPI) now at 5%, almost none of us are making a real return on our money after inflation and tax. Lower-rate taxpayers are at least in with a chance as long as they keep their eyes on the best-buy tables. They need to get 6.25%, something a few best-buy accounts will let them do – according to Moneysupermarket.com, Bradford & Bingley has an internet account currently paying 6.51%. But higher-rate taxpayers haven’t a hope. They need to get 8.33% on their cash to break even, and that’s just not possible at the moment.
Matters can be slightly improved by putting money into a cash-only Isa. This knocks out the tax bit of the equation and means that both higher and lower-rate taxpayers need only make 5% to make a real return. It is good news then that, at the top of the best-buy tables, HSBC and Barclays are offering 6.25%. But you can only put £3,600 a year into a cash Isa, so if you are sitting on a pile of cash this might not help you out much.
So what’s the solution? Assuming you have or need a mortgage, it might be an offset mortgage – a deal that allows you to offset your savings against your mortgage debt. So if you have a mortgage of, say, £250,000 and cash savings of £100,000, you pay interest on only £150,000 of your debt. So you pay less interest in lieu of receiving interest on your savings – a net effect that is much the same as receiving interest on the savings, but not paying tax on it. There are various calculators on the internet that will figure out how much these savings will come to, but according to www.rbs.co.uk, with savings of £100,000 and a mortgage of £250,000 you would, even taking into account forgone interest on savings, save a total of £175,306 and pay off your mortgage ten years early.
We’ve been mildly down on offsets in the past as they’ve tended to offer bad rates relative to the rest of the market. This is something that has often cancelled out the benefits: if you didn’t have at least 10% of the value of your mortgage in cash it wasn’t worth the bother. But that’s not the case any more. Today, offset rates are so low that all taxpayers with both mortgages and savings should probably be looking at them.
The Sunday Times points to two new deals on the market: one from Newcastle with a five-year fixed rate of 5.6%, and the other from Scottish Widows, which offers a three-year tracker currently at 5.75%. Both compare favourably with non-offset best buys. The next best five-year fixes come in at 5.9% to 6%, while non-offset trackers are priced at similar levels to the Scottish Widows offering. Clare Francis of Moneysupermarket.com also suggests a three-year tracker from Nationwide that is now charging 5.74% and comes with a lower arrangement fee than the Scottish Widows offering (£599 versus a pretty shocking £2,499).