Ian Jeffery, sales and marketing director at Intelligent Finance, says the client should consider an offset mortgage as a means of getting the most out of his money I wish more people were like Dr Johnson and considered reviewing their finances at regular intervals. Too often people take out policies, set up the direct debit and then forget about it without accounting for changing circumstances.
With an estimated cost of £20,000, Dr Johnson's home improvements will be a major commitment for the family. Equity release is definitely the cheapest way to borrow. Even with Intelligent Finance's rates, a personal loan would cost him an APR of 8.9% but if he took out equity release he'd be paying the £20,000 at only 4.95% APR. Clearly with a house worth £250,000 and a mortgage of only £120,000, Dr Johnson would probably have no problem in applying for a remortgage of £140,000 to cover the cost of the improvements.
As he'd likely be able to get more than the amount required for improvements to the house, Dr Johnson could also look at this route for paying off any outstanding loans he may have – such as for the family car – but he would need to see if there were any penalties for redeeming the existing loans. Intelligent Finance's personal loans have no redemption penalties despite being on a fixed rate for the life of the loan. However, many loan providers charge large penalties for redeeming loans early – a by-product of the rule of 78.
Dr Johnson also has a tax bill of £15,000, which needs to be paid in two installments in July and then again in January. As this is an inevitable expenditure, I would expect that Dr Johnson puts away an amount each month in some sort of savings account. It's worth looking at where this money is kept as many high-street savings accounts are paying particularly poorly at the moment in relation to online banks. In fact, if he opened up one of Intelligent Finance's new sole trader direct access accounts (DASA), he'd be able to earn 3.8% gross AER (annual earnings rate) on his savings.
The downside of putting money into a savings account is that the government taxes Dr Johnson on any interest earned. So by setting up a savings account to pay the taxman, he's effectively paying the taxman twice.
To avoid this, he could consider using the sole trader DASA to offset against a mortgage with Intelligent Finance. This product is particularly designed to enable sole traders to offset against their personal borrowings and would mean that we would only be charging interest on the difference between the mortgage balance and the balance in the savings account. Over the term of the mortgage, if it were a capital and interest mortgage, Dr Johnson would save £8,379.77 and be able to pay off the £140,000 mortgage 10 months early.
In fact, as a higher rate taxpayer, to match the benefits of offsetting, he would have to find a savings account paying 8.1% on his savings.