First Direct offset account questions

PandoraBox

hi there,

I have recently remortgaged my property with First Direct - only reason being the attractive rate of 4.99% for 5 years (booked it in February). I am also very new to all these offset account business but can someone explain how this works with tax liability.
ok basically I'm a higher tax payer, i also understand that my mortgage is currently linked to my current account which offsets the mortgage - so far so good -so if i understand well this means that my 10k in my current account is effectively earning me 4.99% net which would be 8.31% gross - pretty good rate in my opinion. Is there a catch somewhere ? do you see it as a loophole that the government might do something about ? also if i move the money into the saving account - which is also linked and returns 2% - is it equivalent to having it a 10.31% gross saving account ?
In that case is there any point saving into an cash ISA if you have such mortgage ?
I also read that offseting only if you have big savings but it should also work well as a current account where the salary is being paid - I mean the rate is still the same - am i wrong somewhere??

sorry to ask so many questions - i know there is a pinned thread but it is long and complex for me to follow.:o

thanks

lisyloo

Is there a catch somewhere ?

Only one small one I can think of.
If you offset then the amount in the account may be considered a savings if you came to claim means tested benefits.
If you have a partner and both work then you may well not be a candidate for such benefits, so it's not a huge issue.
But my understanding is that if you have £200K mortgage and £50K savings then the savings count AGAINST you, whereas if you have £150K mortgage and no savings then it doesn't.
One simple way round this is to move the savings to pay OFF the mortgage.
I believe you can take it back again.
As I said this may not be a issue for you at all.

Other than that there is no catch.

do you see it as a loophole that the government might do something about ?

What would they do?
Offsets have been a while and the government haven't done anything yet.
I wouldn't worry too much about that.

also if i move the money into the saving account - which is also linked and returns 2% - is it equivalent to having it a 10.31% gross saving account ?

I don't think you've got that right.
I think 2% is what non-offset people get.
You will get 4.99% which is the equivalent of 8.31% and paying 40% tax.
I'm pretty sure you won't get 2% on top.

In that case is there any point saving into an cash ISA if you have such mortgage ?

Yes, absolutely.
8.31% sounds good but it's is a "paper" figure.
You actually GET 4.99%.
My ISA pays 6.25% so that's better.

So you need to compare 6.25% NET with 4.99% NET unless you like to think your helping schools and the NHS by paying more tax.

The second reason is that ISAs last for LIFE and your tax free mortgage deal will last for the term.
Now I don't know your age and term but LIFE could be decades longer.
So it makes sense to make use of your tax free allowances.

For example let's assume you come into an inheritance (which is certainly a possibility for me). If you get a large lump sum you can NOT put it into an ISA because of the limits. But you could pay it off your mortgage.
So it's best to use your ISAs when you can as they are very valuable, then pay down your mortgage with anything that doesn't for in the ISA (which may be excess savings of could be a lump sum).

I also read that offseting only if you have big savings but it should also work well as a current account where the salary is being paid - I mean the rate is still the same - am i wrong somewhere??

What I suspect you have read is that it's only WORTH offsetting if you have a lot of savings.
This information is old and out of date.
It's only USED to be worthwhile because offset rates were higher than discount rates, so it only worked if you had large savings.
Now with First Direct the mortgage rates are comparable so offsetting is a "no brainer" and yes you should offset your current account.
If possible move everything over.

Another advantage is that you won't have to put your savings income on your tax return so there is less hassle there (as there will be no interest to tax).

whu

With the FD offset your current account and savings account are both taken into account for offsetting (you dont get interest on either account) - at this rate I would also use this years ISA allowance and then offset the rest - how much you will save on mortgage payments will depend on your mortgage and how much you have to offset