How to earn 8% with no risk

By Liz Phillips for MailOnline
Updated: 19:00 EDT, 18 March 2003

HOMEOWNERS in the higher tax bracket can earn nearly 8% on their savings and those paying tax at the basic rate can make almost 6%, despite the recent base rate cut.

Best of all, you do not have to take any risk with your spare cash to earn this rate, but it is available only to those with a mortgage.

The way to do it is to take out one of the offset or current account mortgages available from a number of banks and building societies, including Barclays, NatWest, Royal Bank of Scotland, Woolwich and Yorkshire Building Society.

Though no interest is paid on your savings, they are used to reduce your mortgage balance. So if your mortgage rate is 4.75%, as it is with Intelligent Finance, your savings would be earning the equivalent of 7.9% for higher earners and 5.9% for basic-rate taxpayers. Because no interest is paid on your savings there is no tax to pay.

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• TREE surgeon Scott Elbourne, 31, and his wife Helen (pictured), took out an offset mortgage last year when they were buying a three-bedroom house in Birmingham. The £54,000 mortgage was with Yorkshire Building Society.

Scott says: 'I thought about using my savings to pay off part of my mortgage but I wanted to have access to my money at any time. I didn't know how easy it would be to borrow it back if I needed it. 'Now, I have the best of both worlds. My savings reduce my mortgage debt so they bring down my monthly mortgage payments, but I still have access to my money whenever I want it. 'This way, I get a better return than in a traditional savings account and I have put the maximum amount into a cash Isa.'

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With an offset mortgage your savings are kept in a separate account from your mortgage, so you still have access to your money whenever you need it.

With a current account mortgage, your loan, savings and salary are combined in one account where you can draw money out as you need it. They work on the principle that it is cheaper to borrow from yourself than anyone else.

For example, if you have a £80,000 mortgage and £10,000 in savings, you would only pay interest on £70,000 of the loan, which is calculated daily.

With most banks offering offset mortgages, you have to have your current account with them, too. This makes sense as the money in your current account is also used to reduce the amount you owe on your mortgage each day.

If you choose to take interest on your savings with them instead, you would earn far less.

Offset and current account mortgages are flexible, letting you overpay if you want to pay your mortgage faster, take payment holidays or make underpayments.

You can also borrow more on your house easily in most cases, provided you stay within your pre-agreed limit.