Making offsets work in your favour

grangett_2 · 22 December 2005 at 6:23PM

Hi all,

Here is the question I am struggling with.

House worth £230,000 Mortgage remianing £73,000 Interest rate discount 4.55% (discount period runs out next September 2006)

Savings basket of approx £50K in cash isas, stock isas, toisa and high interest savings accounts.

Three endowments to pay off in next 12 months - one valued at £26,000, one at £12,000 and one at £5,000.

Also saving max amount into wife and my own cash isas between now and next September.

As you can see I will be able to pay off the mortgage fairly easily and still be left with a good savings amount. However here are the variables....
daughter starts University next October and I would like to help her out and avoid her having huge debts through the student loans and I may also want to raise some funds to support a business venture.

My thought was to look at an offset mortgage (IF one sprang to mind) and a friend explained a complicated scheme of holding my savings of same amount as mortgage in different pots and then paying into the mortgage pot by an amount that exceeded the interest. I have to confess I don't quite get this - can someone explain it more clearly (the advantages, disadvantages)? Or am I confusing you all?

Thanks for any advice!

silvercar · 22 December 2005 at 7:14PM

offset basics: you put all your savings in a special mortgage savings account. The interest you are then charged is based on the mortgage amount outstanding less the amount in your savings account. ( eg mortgage £100k, savings £30, charged interest on £70k)

In theory, this should be beneficial if the NET interest you can get on your savings is less than your mortgage rate. But there are many variable not least that the mortgage rate on offset accounts is often at a higher rate than the cheapest mortgages around.

Joe_Bloggs · 22 December 2005 at 9:49PM

I've had an IF mortgage. The rates do tend to shoot up once the introductory period is over. Consider the Yorkshire Building Society as an alternative provider www.ybs.co.uk . I don't think they use brokers so you have to go direct to them.
J_B. (Not a financial advisor)

Bermuda_John · 23 December 2005 at 2:42PM

As silvercar said, you offset your savings against the outstanding loan amount.

The offset works as follows:

Mortgage outstanding: 73,000

Savings: 50,000

Account balance: 23,000

Lets say the interest rate on the account is 6%.

Interest to pay: 23k *0.06/12 = 115 per month

Without offset @ 4.55% = 73,000 * .0455/12= 276 per month

However you are losing interest on your savings as they are now offset against you mortgage.

50k @ 4% = 50*.04/12 = 166

Before offset:

Mortgage= 276
less investment income = 166

Monthly outgoing = 110

With offset:

Monthly outgoing = 115per month

So you are actually no better off BUT your mortgage is currently discounted and 6% is probably inaccurate for the offset interest rate so you will save.

There is however ONE MASSIVE FLAW in the simple calcualtions above.

One element of an offset which people often overlook is the daily interest charge. It isnt as simple as the example above as interest is charged on your daily balance. Therefore if you pay your wages into the account on that day the interest charge will be significantly lower and over the next few days as you slowly decrease this amount the interest saved also increases.

You can also overpay and underpay, so i would recommend paying the amount you currently pay on your mortgage as this would result in big savings. As the interest element of the payment has halved, per the above calculations, you will be paying off nearly 100 per month extra capital.

To work out your savings use this link........

http://www.oneaccount.com/onev3/calculator/calculator-detailed.shtml

I would say go with an offset if your savings are greater than 30% of your mortgage balance.

You also get an overdraft facility equal to a conservative estimate of your house value.

In your case you would have an no qualms overdraft of say 225,000 which you could use whenever you liked. Obviuosly your monthly payment would go up.

The bit your friend is on about in terms off pots etc is purely cosmetic. Some people dont like the thought off going to the statement and seeing a balance of -25,000 on the screen.

What the pots allow you to do is split the savings element on the screen to show you how much is savings and how much is loan. It is basically to give you more information and give comfort to those people who want more information on the status of the loan amount and their savings.

If you need some further info send me a private message.

Hope this helps

John

:xmastree:

canny_yorkshireman_2 · 23 December 2005 at 2:49PM

try this for a simple guide to how it works
https://www.if.com
the front page has alink to an animated guide
hth

rozeepozee · 23 December 2005 at 7:02PM

I just remortgaged through London & Country and they even managed to find me an offset with my BTL (5.29% with the Clydesdale). It's not only IF who do the regular offsets, I know Natwest do too and I'm sure there must be more. I can see the products arent as cheap. However, the great thing for me is the flexibility. I usually have a reasonable savings pot which until now I've had in a deposit account earning 4% ish taxed as a higher rate tax payer. With the offset, I can use it to reduce the cost of my mortgage- yet if I need extra funds, they are always available.

Making offsets work in your favour

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