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Woolwich example: how to lose money by offsetting
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jamesd
Posts: 26,103 Forumite
The Woolwich gives a nice offset mortgage example:
"We've cut years and thousands of pounds off our mortgage. We had an £87,000 repayment mortgage and £7,000 savings. We wanted to be able to get at our savings if we needed to, but use them to our advantage in the meantime. So we took an Offset Mortgage. This means we offset our savings against what we owe. So we only pay interest on the difference between the two amounts: £80,000. This is saving us a total of £15,736.75** in interest on our original mortgage term, meaning we could pay it off three years and nine months early".
Really impressive claim. Until you look more closely.
87000 repayment mortgage, 7000 savings.
Offset lifetime tracker interest rate 5.50% (no fees, 80%LTV) [595 fee, 5.23%]
Lifetime tracker interest rate 5.14% (no fees, 80% LTV) [595 fee, 4.99%]
Interest rate difference 0.36% no fees, 0.24% fees. (Why higher for the no fees version?)
Fees paid comparison for first year, ignoring effects of payments on capital, so numbers are right for interest only, not quite right for repayment.
Interest on tracker = 4.99% x 87000 = 4341.30
Interest on offset = 5.23% x (87000-7000) = 4184.00
Saved interest by offsetting = 157.30
Net interest rate needed to earn 157.30 interest on 7000 = 2.25%
Gross interest rate needed for basic rate tax payer = 2.82%
Gross interest rate needed for a higher rate tax payer = 3.75%
Using ICICI 5.15% savings account, after basic rate tax you earn interest of 288.40
Leaving you 288.40 - 157.30 = 131.10 better off by not offsetting.
If the customer had chosen the fees free version instead it works like this, a still worse deal.
Interest on tracker = 5.14% x 87000 = 4471.80
Interest on offset = 5.50% x (87000-7000) = 4400.00
Saved interest by offsetting = 71.80
Net interest rate needed to earn 157.30 interest on 7000 = 1.03%
Gross interest rate needed for basic rate tax payer = 1.29%
Gross interest rate needed for a higher rate tax payer = 1.72%
Using ICICI 5.15% savings account, after basic rate tax you earn interest of 288.40
Leaving you 288.40 - 71.80 = 216.60 better off by not offsetting.
Their customer could have overpaid on the tracker mortgage, which allows overpayments. Overpaying by 7000 at the start of the fees paid mortgage would have left them with a year one interest charge of 4112, saving them 72 compared to the 4184 paid on the offset mortgage. It's not quite comparable, though. They would have to pay 6.59% to borrow the savings back using the mortgage reserve facility if they wanted to use them - the tracker mortgage appears not to allow drawdown as a standard facility. The offset versions charge the same rate for this facility as the mortgage interest.
End result of the Woolwich example: their customer is worse off taking their offset mortgage than their tracker mortgage.
This is just an example showing the effect that the higher interest rates for offset mortgages have on them compared to non-offset mortgages. The Woolwich isn't the only case this applies to, just the example used here. All numbers are approximate.
"We've cut years and thousands of pounds off our mortgage. We had an £87,000 repayment mortgage and £7,000 savings. We wanted to be able to get at our savings if we needed to, but use them to our advantage in the meantime. So we took an Offset Mortgage. This means we offset our savings against what we owe. So we only pay interest on the difference between the two amounts: £80,000. This is saving us a total of £15,736.75** in interest on our original mortgage term, meaning we could pay it off three years and nine months early".
Really impressive claim. Until you look more closely.
87000 repayment mortgage, 7000 savings.
Offset lifetime tracker interest rate 5.50% (no fees, 80%LTV) [595 fee, 5.23%]
Lifetime tracker interest rate 5.14% (no fees, 80% LTV) [595 fee, 4.99%]
Interest rate difference 0.36% no fees, 0.24% fees. (Why higher for the no fees version?)
Fees paid comparison for first year, ignoring effects of payments on capital, so numbers are right for interest only, not quite right for repayment.
Interest on tracker = 4.99% x 87000 = 4341.30
Interest on offset = 5.23% x (87000-7000) = 4184.00
Saved interest by offsetting = 157.30
Net interest rate needed to earn 157.30 interest on 7000 = 2.25%
Gross interest rate needed for basic rate tax payer = 2.82%
Gross interest rate needed for a higher rate tax payer = 3.75%
Using ICICI 5.15% savings account, after basic rate tax you earn interest of 288.40
Leaving you 288.40 - 157.30 = 131.10 better off by not offsetting.
If the customer had chosen the fees free version instead it works like this, a still worse deal.
Interest on tracker = 5.14% x 87000 = 4471.80
Interest on offset = 5.50% x (87000-7000) = 4400.00
Saved interest by offsetting = 71.80
Net interest rate needed to earn 157.30 interest on 7000 = 1.03%
Gross interest rate needed for basic rate tax payer = 1.29%
Gross interest rate needed for a higher rate tax payer = 1.72%
Using ICICI 5.15% savings account, after basic rate tax you earn interest of 288.40
Leaving you 288.40 - 71.80 = 216.60 better off by not offsetting.
Their customer could have overpaid on the tracker mortgage, which allows overpayments. Overpaying by 7000 at the start of the fees paid mortgage would have left them with a year one interest charge of 4112, saving them 72 compared to the 4184 paid on the offset mortgage. It's not quite comparable, though. They would have to pay 6.59% to borrow the savings back using the mortgage reserve facility if they wanted to use them - the tracker mortgage appears not to allow drawdown as a standard facility. The offset versions charge the same rate for this facility as the mortgage interest.
End result of the Woolwich example: their customer is worse off taking their offset mortgage than their tracker mortgage.
This is just an example showing the effect that the higher interest rates for offset mortgages have on them compared to non-offset mortgages. The Woolwich isn't the only case this applies to, just the example used here. All numbers are approximate.
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Comments
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Nice to revive an ancient thread, particularly when the OP was someone as sensible as jamesd.
I'm now interesting in remortgaging to the Woolwich offset. My case for it now is that the only 2 decent tracker products they offer are:
- 5.74% (BBR+0.74%) no fees lifetime tracker; or
- 5.74% (BBR+0.74%) £595 fee lifetime tracker offset.
Obviously the differences between the two are that one is an offset (the other isn't) and one has a £595 fee.
Normally I share jamesd's disdain for offset, because of the rate differential involved. But I have a few reasons for liking this offset product:
- the rate isn't higher;
- I can derive a small amount of benefit from offsetting, including offsetting ISA balances which will mean that I have some "tax protected" funds when I eventually choose to redeem the mortgage; and
- I can lock in a rate of BBR+0.74% for as many years as I like, and get a "facility" far higher than the size of my present mortgage which would enable me to port it in future should I wish to move (or indeed use the money for anything else) all at the BBR+0.74% rate.
What do you think?
There are cheaper trackers available, but nothing as good as this which is both tracker and offset IMHO.0 -
I think its a good deal.
I've got a lifetime offset tracker at BOE +0.75% and I'm happy knowing that there are no penalties for leaving, so if it doesn't suit I can find a better deal. While it does suit I have no arrangement fees to find every couple of years.
One thing I like about offsets is that you don't need to keep moving your savings around to make sure you are getting the best rate you can. Also if you do move savings around you invariably lose a few days of interest, something that comparisons don't show.I'm a Forum Ambassador on the housing, mortgages & student money saving boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Forum Ambassadors are not moderators and don't read every post. If you spot an illegal or inappropriate post then please report it to forumteam@moneysavingexpert.com (it's not part of my role to deal with this). Any views are mine and not the official line of MoneySavingExpert.com.0 -
Thanks, silvercar. I'm pretty convinced that I'll do the application over the phone tomorrow.
The member of staff I spoke to was very good and explained everything I wanted to ask. And she gave me an extension number to get hold of her again tomorrow to complete the deal.
As you say, it's nice to have a one-way bet on interest rates. If the market improves, and lenders start throwing money around again, I can always redeem at no cost (apart from the £275 MEAF) and take the deals on offer at the time.
And if I start offsetting, I can stop worrying about my current account balance and moving money from current account > savings > mortgage and back again all the time.0 -
How long will it take you to gain enough to recover the 595 fee for the offset option? Compared to say using a normal taxed savings account what's the after tax difference between interest saved on the mortgage and after tax interest made on the savings account (or tax free if you'd use the ISA option)?
Personally the BlackRock UK Absolute Alpha fund has made me even more reluctant to think that it's a good idea if you're comfortable taking more investment risk than a savings account. Grows with capital gain not interest, so tax free even outside an ISA or pension if you have CGT allowance available and seems on track to grow by 10-12% this year. It's where a large chunk of my property deposit money is going.
Life of mortgage trackers, particularly those that are portable, offer a great deal of certainty. Particularly with a possible recession coming up: no chance of having to remortgage just after losing your job, as you might have to with a term limited deal, nor a risk of the Northern Rock uncompetitive renewal deals.
I'd still be tempted by this tracker for tax reasons but Absolute Alpha would probably win as a place to put the money.
I really like the concept of current account and offset mortgages. I just keep finding things that seem like better deals than them...
If I could get either for the same price as a flexible mortgage I'd go for it. 0 -
Unless I am missing something I don't see the benefit of offsetting an ISA (at the moment anyway). If the mortgage is at 5.74% and you have an ISA paying 6+% surely you are better off leaving the isa to earn interest at a greater rate than it would reduce the mortgage by. I guess going back 12 months or so the offset rates were higher than ISAs making it justifiable.
I guess the other downside to offsetting your ISA is that you have no interest to build up your ISA, so if you maintain a separate ISA and eventually pay off the mortgage you will have a bigger tax free ISA pot than if you had offset.
That said, I am quite tempted by the Woolwich offset given that it is the same rate as the basic tracker. Just need to figure out how long it would take claw back the £600 fee.0 -
It seems when offsets were traditionally pitched higher to a standard fix rate then the arguments about the benefits were there for all to see. However recently the likes of First Direct etc have shown that in fact offsets can even be up with market leading fixed rates, which is why FD got swamped earlier this year on their very competitive fix offsets. I think the way offsets are set up offers a lot of flexibility, you can either run them as a normal repayment mortgage by setting up an SO to cover the capital, or just pay as an interest only and look for better investment returns over the term of the mortgage or a combination of the two. Add to that the expected payment holidays, overpayment flexibility, borrow back facility and offset funds make them I think a compelling proposition.0
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I am definitely marginal about taking the offset compared to the non-offset.How long will it take you to gain enough to recover the 595 fee for the offset option? Compared to say using a normal taxed savings account what's the after tax difference between interest saved on the mortgage and after tax interest made on the savings account (or tax free if you'd use the ISA option)?
Personally the BlackRock UK Absolute Alpha fund has made me even more reluctant to think that it's a good idea if you're comfortable taking more investment risk than a savings account. Grows with capital gain not interest, so tax free even outside an ISA or pension if you have CGT allowance available and seems on track to grow by 10-12% this year. It's where a large chunk of my property deposit money is going.
Life of mortgage trackers, particularly those that are portable, offer a great deal of certainty. Particularly with a possible recession coming up: no chance of having to remortgage just after losing your job, as you might have to with a term limited deal, nor a risk of the Northern Rock uncompetitive renewal deals.
I'd still be tempted by this tracker for tax reasons but Absolute Alpha would probably win as a place to put the money.
I really like the concept of current account and offset mortgages. I just keep finding things that seem like better deals than them... If I could get either for the same price as a flexible mortgage I'd go for it.
My reasons for going for it are more related to the benefit of locking in the BBR+0.74% on a larger sum of money than I actually need for my mortgage, to give me the option of porting the larger amount if and when I move house.
If I opt for the non-offset, I can do the same, but I'll have to pay interest at 5.74% on £70k that I don't really need. I can't invest £70k tax-free.
If I say £70k @ (say) 6% less 20% tax = £3,360 compared to paying £70k @ 5.74% = £4,018, in one year the £595 fee has been more than covered.
And that's ignoring the fact that, by having an offset, I'll stop having to spend any time and effort moving money around as I currently do on a daily basis. Having £70k offset is like having a £70k authorised overdraft which gives a lot of flexibility.0 -
Dont forget that any savings you have in an offset account arent including in most benefits means testing which could come in very handy if your made redundant0
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Can you substantiate that, lonestar1? It seems very hard to rationalise to me ... the whole point is that the accounts are separate, although offset.0
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MarkyMarkD, yes that ability to borrow more than you need and put it into the offset account as an emergency fund is potentially interesting.0
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