Offsetting and Overpayments

MrsVanderkamp

Sorry if i've confused you! We are not already 100% offset, we have savings of about £10k, so with the £65k we would almost be £100% offset.
It's the question of whether this would benefit us as much as I initially thought, on the basis we would have to cover my mom's £200 per month interest??

Or would we just be better off keeping the £200 pm, plus whatever else we can save in our offset?

Hope you're not more confused than ever now - I am!

StuartGMC

Now I C....

Remember, you'll still I assume be paying off the capital, so as this reduces, you'll have savings above that value which will start to earn interest (less tax) I assume, so this would slowly increase as the capital reduces so you would "top up less" each month over time?

Would it make sense to transfer the excess funds back to your mum so she can get interest (tax free?) as the capital reduces and you no longer need the offset? Not so easy to work out the "interest" to then pay her though!

Not sure that helps you though!?

MrsVanderkamp

Thanks Stuart, I see what you mean, effectively, if our mortgage was 'interest free' the capital would reduce each month by the amount of our monthly payment, so we would need less to offset each month and could move the savings back into an account paying interest.

Overall, do you think it is a good idea and that we would save time off our mortgage and interest in the long run?

lizziebell*80

I want to see if there is a calcualtor that helps you work out how much ssoner different amounts of offset savings reduce the term?? Seems to be calculators for other types of overpayments

getmore4less

Ok two points to follow up,
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Overpayments v offsetiing makes no differnce to the term/cost of the loan
Pay it off a bit at a time or all at the end/100% offset, it will be the same.
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Offseting mums money, DO IT, and as a gesture of good will split the extra savings.

There is the trust, death, TAX issues to consider but it will save you money if the net interest rate on the savings is less than the mortgage rate

This could fall foul of tax both Income and IHT so watch the paper trail but most people just keep it quiet.

Once 100% offset look carefully at the options, best option I think is you just feed mum her money back as you build up your offset funds and or MAX out your cash ISAs.

Oh, your mum is making full use of her ISA allowances allready.

The tax situation can get complicated most people just ignore it and it does not effect them. One way to think of it is you get a big gift, NO IHT after 7years, and you gift your mum out of surplus income again no tax.

lizziebell*80

I had kind of worked it out, but cheers for the clarification. I think I will just keep putting into the offset account then. I will also check out ISAs and see if these would be a good idea too.

Jonbvn

Mrs V,

You have not mentioned your mortgage rate(s). Without this info, it is difficult to comment.

Regarding the gift of 65k, you really have to be careful with the taxman. BTW, your mother is getting a terrible rate on her savings. She could do much better, and get a lot tax-free.

MrsVanderkamp

Our mortgate rate is currently 5.9%

My mothers savings are with ING direct which I think pays 5% at the moment, she likes this account as it pays the interest monthly and she can withdraw this as and when she pleases.

Are there any other acconts around that would give her interest monthly and the same flexibility but pay more interest than this?

gallygirl

Mrs V, maybe it's worth giving C&G a ring. Would they be happy to keep mortgage going if you were 100% offset?

If you were 100% offset you would effectively go into credit with each mortgage payment and they don't pay you any interest so you would really need to take the equivalent amount out of offset each month & put elsewhere. It could all get a bit messy so I'd be tempted to leave a balance on mortgage of say 15k, pay the same amount each month (taking into account say £150 a month to mum), get mortgage 100% offset then take another 15k out etc.

With regards to her savings there are lots of good accounts paying monthly interest - Kaupthing Edge & B&B are both paying over 6.5% - internet accounts, but assume she is ok with this as I think ING is also internet only? An extra 1.5% is worth around 1k a year to her, before tax, so not to be sniffed at. ING Direct currently paying 6% with 1% intro bonus - if she is only getting 5% she should close as a matter of principle!

getmore4less

MrsVanderkamp wrote: »

Our mortgate rate is currently 5.9%

My mothers savings are with ING direct which I think pays 5% at the moment, she likes this account as it pays the interest monthly and she can withdraw this as and when she pleases.

Are there any other acconts around that would give her interest monthly and the same flexibility but pay more interest than this?

Thing is the tax still makes it hard to better the mortgage rate so using it to offset makes sense. (20% tax you need 7.375%)

If she is just spending roughly the interest over the year then one approach is for you to take most of the money(leaving her a float say 1k in a spend pot) put it in a seperate offseting account and set up a standing order for the interest you will be paying her from you normal accounts to her spends pot(same account she has). every time the interest rate or the amount lent changes adjust the standing order.

Good point to check the situation when 100% offset I think some lenders do close the mortgage when 100%, but keep the net ballance as low as possible.

Your mum should be using her cash ISA allowances, there are those that pay interest monthly but it is better to leave the money in and deplete capital elsewhere that is earning taxed income. I would set up ISA for mum feeding from her offset pot each year and leaving the interest to compound, you pay mum interest based on her offset pot to her spend pot, each time the ISA gets some interest(make it annual to keep it simple) transfer that amount from the offset pot to mums spend pot.

BY the time she gets all her money back a lot of it will be in cash ISA, and she can continue to slowly transfer the rest over time using the same technique.

Sounds a bit complicated but once set up it would not need a lot of work.