A brain wave on saving money on my offset mortgage????

Donna410

I had what I think is a brainwave but would like advice if others think this sounds good or not?

I am in the process of starting a fixed rate at 5.49% for 2 years with First Direct this is an offset mortgage.

I have setup an offset savings account too, the girl told me on the phone this is equivalent to receiving 7.7% interest albeit this is not added to the savings account, but is what we will save on the actual mortgage as we would be paying less interest on the mortgage.

Ok so here's the brainwave. I bought a new car in March for £15500 and took out a loan for £14000 with the AA over 3 years. Total repayable on the loan £15200.

I've decided to sell the car, and not to replace it. Rather than paying the AA off, I thought I could put the £14000 I make from the sale of the car into the savings account. This would make £2240 in interest over 2 years, covering the interest on the loan plus a profit of £1000! Plus I would have paid off the loan but still have £14000 in my savings account!!

Does anyone else thinks this is a good plan or can anyone forsee any issues I might have?

testertrev

[quote=Donna41I've decided to sell the car, and not to replace it. Rather than paying the AA off, I thought I could put the £14000 I make from the sale of the car into the savings account. This would make £2240 in interest over 2 years, covering the interest on the loan plus a profit of £1000! Plus I would have paid off the loan but still have £14000 in my savings account!!
0;discussion/1182783]

Does anyone else thinks this is a good plan or can anyone forsee any issues I might have?[/quote]

The obvious flaw is:-

You'll still have to give the AA the £14000 as well.

The practicalities are:-

You may not get £14000 for the car

As its an offset against the mortgage you won't get any interest.

Doesn't appear to be a good plan.

dimbo61

The 7.7% is the rate you would need to get before TAX from a savings account to match the amount you are saving by having that money in an offset account.
Sell the car and repay the AA loan
Use whatever money you are saving by not having a car loan to either overpay the mortgage or put into offset account. GOOD LUCK

Donna410

The lady on the phone said I wouldn't be taxed on this, as I don't actually receive any interest money on the savings account. In effect the interest that would normally be paid in, is instead paid off on the mortgage.

E.g. If I do not offset my mortgage, my payments would £530 a month. By having an additional £20,000 in an offset savings account(we have £6000 of savings elsewhere), this brings my the payment down to £460. Also the total repayable for the £530 a month is £150,000. But with offsetting the £20,000 the total repayable is £122,000, nearly a £30,000 saving over 25 years. However we do intend to overpay on the mortgage and get it down further.

With your comment to I still need to pay the AA £14,000, i know that. If you look at like this, the AA is like my savings bank. I pay them they're monthly payments for the remainder term of the loan thus in total I pay them £15,200. However I have kept the £14000 in the savings account - it's still there, but I have accrued £2200 in interest bring the total to £16200. If you take away the interest I paid the AA for the loan, £1200. That still leaves me with £14000 plus an additional £1000 in interest.

Kez100

I don't think you will sell the car for £14k. Not if it were sold by a garage in March for £15.5k.

Cat695

is it a brand new car....or new for you?? as new cars lose approx 20% of there value when you drive them off the forecourt (thats 3000k on your car) and NO dealer would give you anywhere new that!!!http://www.thisismoney.co.uk/consumer/savingideas/article.html?in_article_id=449783&in_page_id=512

so i would be shocked if you got 14000k for it (especially as we are in a credit crunch!!)

Unless its a new mini cooper as they seem to have the losest depreciation
:-)

lisyloo

Donna410 wrote: »

the girl told me on the phone this is equivalent to receiving 7.7% interest albeit this is not added to the savings account, but is what we will save on the actual mortgage as we would be paying less interest on the mortgage.

Either the girl on the phone told you incorrectly or you have misunderstood.

5.49 is equivalent to receiving 7.7 GROSS, then paying tax, then receiving 5.49% after tax (this is called NET whereas GROSS is before tax).
The comparison is correct, but you will only actually be saving 5.49%.

She might have confused you or you misunderstood, but you definitely won't be getting 7.7%.

Donna410

lisyloo wrote: »

Either the girl on the phone told you incorrectly or you have misunderstood.

5.49 is equivalent to receiving 7.7 GROSS, then paying tax, then receiving 5.49% after tax (this is called NET whereas GROSS is before tax).
The comparison is correct, but you will only actually be saving 5.49%.

She might have confused you or you misunderstood, but you definitely won't be getting 7.7%.

I phoned up First Direct to confirm this. the interest rate would 7.76% gross. After Tax this is 6.17%. Re-done my calculations and I still would be £724 better off in the long term. Also if I repay my loan this early back to the AA I would need to pay an early settlement fee.

Put it this way I don't think I will be worse off, after 3 years, as I also miscalculated the loan repayment, I will be up on £724, and that is paying off the AA loan plus interest.

I worked out after tax by offsetting the loan, I will pay off an extra £850 a year on my mortgage. Now no savings account will be this beneficial, if i were to pay off the loan, and just save £333 a month. The total amount in a year would 3996, even if I were to put this in an ISA I wouldn't make this amount, as interest will be calcuated on either a daily/monthly basis and not the final amount I saved at the end of the year.

The car is only 6 months old and is a brand new Audi with very low mileage, so I think I will get around somewhere in the region of £14000 plus my friend works for the garage.

Locoblade

Donna410 wrote: »

I phoned up First Direct to confirm this. the interest rate would 7.76% gross. After Tax this is 6.17%. Re-done my calculations and I still would be £724 better off in the long term. Also if I repay my loan this early back to the AA I would need to pay an early settlement fee.

This is wrong, the equivalent rate after tax can only equal the rate of the mortgage, i.e 5.49%, because they don't pay you anything on top, they only reduce the amount of capital you pay interest on (at 5.49%). The pseudo savings figure will depend on whether you pay zero tax (ie it stays at 5.49%), 10% tax (6.04%), basic 20% tax (6.56%) or higher rate(7.68%). I suspect they've given you the equivalent rate for a higher rate tax payer.

Anyway, how much is your car loan interest rate?

What you need to remember is interest on SAVINGS is taxed, but interest on any loan is not taxed. You seem to be taking the equivalent SAVINGS rate (which adds the money you'd otherwise lose as tax) that FD have given you, and applying that logic to a loan, this is where you're going wrong.

The basics of it are, if the car loan is less than 5.49% then the money will be better off in the offset, but if its more than 5.49% then you will be better off paying off the loan.

Captain_Mainwaring_2

plus my friend works for the garage.

Oh dear.

Actually you would have come out of it better off if you had taken the money from your savings and purchased you car for cash. You will never win with a car load, no matter what they try and tell you.

Have you read all the clauses of the car loan?

Donna410

Locoblade wrote: »

This is wrong, the equivalent rate after tax can only equal the rate of the mortgage, i.e 5.49%, because they don't pay you anything on top, they only reduce the amount of capital you pay interest on (at 5.49%). The pseudo savings figure will depend on whether you pay zero tax (ie it stays at 5.49%), 10% tax (6.04%), basic 20% tax (6.56%) or higher rate(7.68%). I suspect they've given you the equivalent rate for a higher rate tax payer.

This is from FD website for a 6% variable offset mortgage:

your 1st Account and day-to-day savings benefit from the equivalent of 6.00% gross, 6.17% AER variable on everything you save providing your total credit balances do not exceed your total borrowing (rate based on the offset Mortgage standard variable rate, currently 6.00%)

As I have the 5.49% fixed rate, the girl said I would get 7.76 gross, which is 6.17% after tax. She said it is not taxed as it is offset to a mortgage???!

It also says on their website 'pay no tax on your savings - the higher your tax band, the more you stand to benefit' (http://www.firstdirect.com/mortgages/offset-overview.shtml)

The annual interest rate on the car loan is 6.85%