Offset Mortgage Question

smckay

I am looking to remortgage shortly and like the idea of an offset mortgage as I have some savings.

If I got an offset with no savings and my payments were to be £900pm would putting my savings in the account bring down these monthly payments or would I get interest on this but still pay £900pm?

This is the last hurdle that I can not quite fathom.

Also is there any benefit to an offset current account over othe offset accounts other than the freedom to leave your money where it is?

Cheers

lisyloo

It really depends on the way each individual provider works.

Have you considered a cash ISA.
This might be a higher rate and the tax free treatment last longer.

M2U_2

Hi there

There are a couple of options with using the "offset" amount. Both assume that there's "some" savings in the account to affect the mortgage balance.

(a) "Maintain monthly amount" - which means that you'll keep paying your £900pm, but the amount of interest will be reduced due to your offset amount, and so you'll be paying off more of your capital balance in that month (which will reduce the interest charge next month ... and so on);

(b) "Reduce monthly amount" - which means you'll only pay the agreed capital repayment and the reduced interest charge - so with this option you'll have the saving in your monthly cashflow, but it won't pay your mortgage off any quicker, and you'll incur the same (before offset) interest charge.

One other thing to be aware of ... there's a timing difference between the interest you save by offsetting, and the monthly payment you need to make. So, for example, if you have £1000 in the offset account in August, you'll only get the benefit of that in September - so if you think that by putting money into the offset account in August you'll be saving money in that month ... you won't be.

Oh, and in case you were beginning to get the hang of this ... there's another adjustment required for the number of days in the month!! :T So, for example, your August "savings" (in the offset account) will have 31 days of interest ... good news. But ... in September (only 30 days) you'll get only 30 days of "benefit" for that August interest. The extra day's interest should be allocated to reducing the capital balance.

That's the "in your favour" situation ... the opposite, though, is true from September into October: your saved interest from your September offset balance (30 days) isn't "enough" to save 31 days interest in October. So your October repayment will be just that bit higher.

Bit of a pain, eh?! The bottom line is ... there will be different amounts taken each month, and it can be tricky to check that their calculations are right. But the most important thing is to choose the (a) or (b) option above that achieves what you really want.

Good luck!

Chris

smckay

M2U thanks, I think!

I think option 1 the way I will go, look to get it all paid off!!

M2U_2

You're welcome! I hope it helps a bit.

It can be a bit of a headache to set up in the first place, but it certainly gets your savings working for you. If you want to feel even more confident, you can find a calculator online somewhere that'll tell you how much quicker you'll be rid of the mortgage.

Cheers

:beer:

KiKi

Re the interest question, I have the Abbey Flexible mortgage which has an offset function.

I have all my savings in the savings pot. The interest that I *don't* pay on the same amount of my mortgage is then *credited* to my savings pot and untaxed.

So in effect it acts as a tax free savings account, only without the limit of an ISA. My current rate is 5.49%, so I have an ISA, too, at a higher rate, but all other savings go in here.

I've gotten my mortgage down from 30 years to 8 by doing this. After I pay ISAs etc in, I should actually pay it off in 4 years.

I don't see why people wouldn't get one that operates like the Abbey one, regardless of the amount of savings; if you are getting the interest credited to your account tax free, it's a fantastic option!

Hope you get a product that works for you.

KiKi

ixwood

I don't get it. If it's offset, surely you don't get any interest anywhere, you just pay less interest on the mortgage? i.e the mortgage balance is reduced for interest calculations purposes.

Confused.

happybroker

ixwood wrote: »

I don't get it. If it's offset, surely you don't get any interest anywhere, you just pay less interest on the mortgage? i.e the mortgage balance is reduced for interest calculations purposes.

Confused.

thats it in a nutshell! you can then choose to pay the same each month which means your paying more of the balance, this grows like a snowball rolling down a hill (wow that sounds corny) meaning you pay the balance off more quickly. Alternatively you can pay less each month and take the full term to repay the mortgage.

easy!

ixwood

I was replying to kiki.who seems to have money offset and getting interest too (tax free to boot). Any ideas on that? Surely there's no interest paid cos, its just reducing the mortgage interest?

jackomdj

I guess what Kiki is saying is they transfer the equivalent amout of what they are saving in interest - we do something similar!

KiKi

ixwood wrote: »

I was replying to kiki.who seems to have money offset and getting interest too (tax free to boot). Any ideas on that? Surely there's no interest paid cos, its just reducing the mortgage interest?

Perhaps I can explain better how it works.

Let's say I have £35K in the offset pot. When I pay my mortgage each month, the Abbey pay in an additional £180/month (ish).

So in reality, I actually pay the full interest on my mortgage, but the the interest I *shouldn't* pay on the £30K at 5.49% is then credited to my savings. So in effect, I haven't paid it.

So yes - it's an excellent way to operate a tax-free savings account. The effect on the mortgage is the same, but as I intend to be able to draw on the savings I'd much rather have the interest added to my savings account rather than taken straight off the mortgage.

However, not all offsets operate this way. I think First Direct operate quite differently, given some of the posts I've seen on here.

HTH.
KiKi