Offset mortage balance, but could i profit by moving hte cash elsewhere

rockrat

i cannot seem to get my head around where my cash is best placed to earn most.

here is the situation.

I have an intelligent finance offset mortgage for £197,000 currently paying 5.34% (tracker variable for term at .34% above base)

Of that £197,000 i actually have £110,000 sat in a linked offsett account so in theory costing me no interest (therefore my real mortage debt is £87,000). The reason for having this cash offset is that it forces me to overpay every month which i can afford to do easily, and also in the current credit crunch climate i have quick access to funds should a suitable investment come across my path. So theres no need to actually pay it back to the mortgage.

But, could i profit in the meantime if i put that cash into one of the higher paying accounts such as the Birmingham midshires at 7.11% or the Kaupthing bank account mentioned by Martin?

What really throws me is the fact i will pay tax on those savings accounts. As a 40% tax payer it might not work out to be worth it, though i suppose we could open the account in the wifes name who does not earn a salary and only pay 20%.

if somebody more knowledgable than me can help me out with the maths i would be very grateful.

DeepSporran

Well, it wouldn't be worth it if the savings account is in your name, as the 40% knocks the 7.11% down to 4.27%, compared to the 5.34% you're effectively getting in the offset account.

In your wife's name, the 7.11% nets to 5.69%, which is a bit better than 5.34%.

So, if you put the offset balance into a 7.11 fixed rate account in your wife's name, you'd be about £382 a year better off (6256.80 vs. 5874.00 = 382).

HOWEVER, this assumes the base rate stays the same. If you are in a fixed rate fixed term account like the Birmingham Midshires, you can't get your money out and stick it back in the offset if the bank rate moves up.

If you stick with instant access accounts, you can get about 6.5% - which equates to only 5.2% in your wife's name. So it's not worth it unless you're sure (:rolleyes: ) the base rate will stay the same or go down in the next 12 months, and you're happy to have the cash tied up for a whole year.

bigbloke45

In order to match your offsetting account, you would need to get a net of tax savings return of at least 5.34%, which is what you are saving on your £110,000, equal to a net return of £5,874 p.a. by not paying interest on your loan for this amount.

As a 40% taxpayer, you would need to have a gross return of at least 8.9% to achieve this ( this is calculated by "grossing up" your 5.34% to see what rate you would need to get before tax to equal your 5.34%. The sums are (1-.4=.6), then divide 5.34 by .6, this gives 8.9. To check this is right, you take off 40% tax from the 8.9 i.e. (8.9X.6=5.34).

If your wife is a non-taxpayer, then she can receive up to £5,435 (her personal tax allowance for 2008/9 tax year, plus she will only pay 10% tax on her next £2,320 ( the 10% tax band still stands for savings income, although it was abolished for earned income).

This a very "tight" situation; you are saving £5,874 a year in mortgage interest on your £110,000 at 5.34%. In order to better this, your wife would have to get at least this amount if you transferred £110,000 over to her.

Your calculation then, must be what rate of interest does she need to achieve to get at least £5,874 a year given that she can have £5,435 paying no tax and another £2,320 at 10%. Also, most of the money needs to be "Instant Access" in case you need to get it quickly for an investment.

It turns out to be 5.384% as follows; she can have £5,435 tax free, that leaves another £439.00 to be achieved at a tax of 10% which, grossed up is £488.00 This gives a total income need of £5,923 to be the same as your offsetting savings.

So, £5923/£110,000 X 100 equals 5.384% a year to equal your offsetting; anything above is a bonus. Can you do it? Just, I would say, but it will need constant monitoring. If you don't have the will, I would leave things as they are.

Best of luck. Come back if I've lost you along the way!

rockrat

no, not confused at all. thankyou both so very much.
i figured that it probabaly would not be worth it given all the hassle and close monitoring needed just to save a hundred or so quid, and you have helped to confirm that.

bigbloke45

Glad to have been useful!

PBA

I did similar maths recently as I'm on a similar deal at 5.25% and have about 70k availble. Basically concluded that the profit margin would be so thin that over a year I'd make 100 or so, which would be almost wiped out by the CHAPS fees to transfer to and from the savings.

Cozworth806

If your mortgage is fixed rate then a comparative fixed term savings account would be sensible.
You would only make much up to the tax free portion of your wife's allowance, but if you can make 1.5%+ on that proportion of that money then I would agree it makes sense.

5435 / 6.8% = £80000 (Obviously £453 income per month to help pay the interest if required, if not then an annual interest may receive more) This assumes no other income at all. The only reason this works is that your wife is a non tax payer.

If you left the £30,000 in the offset (for other investment availability) then by my reckoning you would be over a grand £1,000 better off. (5.34% on £80,000 is £4272p.a.) The uncertain factor is the tracker interest rate for the next year or two.
Given the security of your cash you would do well to put the £80,000 in 3 accounts so it is secure.