Finance Fitness
By admin
Issued on behalf of FinanceXchange
WELL you can’t say we weren’t warned. Interest rates went up again as feared – and there’s every chance we haven’t seen the last of the rises yet. Look back at the Finance Fitness column for May and the warning bells for business were already ringing long and loud. Three months ago the message was clear: the best way to ride the storm of rising interest rates is to…get yourself a better deal for your money. And that message is more important today than ever.
There are around four million small businesses in the UK, of which more than 2.5m are sole traders – around half of whom not only have to juggle the normal debt that small businesses are saddled with, but they also have to find the finance for their own personal mortgage on top.
And that is where the relatively new concept of Offset Mortgages can not only provide some added financial flexibility to the cash flow of any business, it can also produce some fairly dramatic savings by making your money work for you.
The idea is extremely simple, but can prove to be very effective. Basically, an Offset Mortgage allows business owners to offset the balances in their business current and savings accounts to help pay off a personal mortgage early – so removing that expensive burden of repayments. In other words, any money you have in your bank savings account will be used to ‘offset’ the mortgage monies you have borrowed against your home, offsetting (ie reducing) the interest payable on the mortgage. So, if you are borrowing £150,000 on a mortgage but have £50,000 of savings in your bank account, you will only be paying interest on £100,000 as the other £50,000 is offset by your savings.
You have to own a property to take out an Offset Mortgage and, of course, you will have to switch your existing personal mortgage to the new arrangement. But as an example, if your home is worth £500,000 and you agree an 80 per cent loan to value, it means you can borrow anything up to £400,000 against that property.
If you borrowed the full £400,000 at 6.5 per cent your interest-only repayments would be £26,000 a year, or £2,166 a month. However, if you used £300,000 of the money to pay off your personal mortgage and then put the remaining £100,000 into a current account linked to your new offset mortgage lender, then those savings can be used to offset the amount you have borrowed. You will then only be paying interest on £300,000, which equates to £19,500 a year or £1,625 a month. That is a saving of £500 a month on the original £400,000 borrowed – and you’ve cleared your personal mortgage.
It’s proving to be a valuable product for business owners in other ways, too. You can always dip into that £100,000 if you need some short-term money and repay it when the cash-flow position improves.
The FinanceXchange Group was founded almost three years ago with a business base built around the Swindon, Bath, Corsham, Chippenham, Westbury, Trowbridge and Melksham areas. Contact business development manager Nicola Carter on 0870 242 3214, or email info@financeXchange.co.uk or via www.financeXchange.co.uk
