Current Account/Offset Mortgage

MM2005

Bokster made the following point on earlier post:

2, depending on cicumstances, you would'nt have to overpay with some of your extra money and pay into the offset savings account with the rest. just putting it into the offset savings account would have pretty much the same effect, but keep that money available if required!

Can I just ask for opinions on this. Say I had an offset mortgage and I could overpay by £1000 per month. Instead of overpaying that amount off the mortgage I put it into the savings account instead. Would that have the same affect as overpaying it (i.e. when I got the end of the term I just then pay off what I saved instead)? I save that amount each month in paying interest on it so it seems right.

Joe_Bloggs

@MM2005 you have to pay tax on interest earned at the rate at which you earn income. Save £1000 in a bank account at 5% then your interest is £50 - £10 tax for a basic rate tax payer. This is £50 - £20 for a high rate tax payer. Do the arithmetic for yourself with your own circumstances. by all means consult this forum on how to do arithmetic.
J_B.

MM2005

Joe_Bloggs wrote:

@MM2005 you have to pay tax on interest earned at the rate at which you earn income. Save £1000 in a bank account at 5% then your interest is £50 - £10 tax for a basic rate tax payer. This is £50 - £20 for a high rate tax payer. Do the arithmetic for yourself with your own circumstances. by all means consult this forum on how to do arithmetic.
J_B.

Sorry, I wasn't clear above - I am talking about an offset mortgage for both cases. That is:

Take out an OFFSET mortgage of £100,000 with OFFSET £30,000 in savings.

Is there any difference between:

1) Overpay the mortgage by £1000 per month.

2) Put the £1000 into the OFFSET savings account.

I don't think tax comes into it with it offset does it?

Joe_Bloggs

There is no difference in the case you have outlined. If you overpay you may be entitled to a payment 'holiday' and/or build up a reserve that could be used as a defence against unforseen circumstances. You can often access your overpayments. The interest rate and the fees linked with the mortgage are the key.
Your mortgage lender does not want to live in your property. They just want to extract the maximum amount of cash that you can pay without you selecting another lender. Mass lenders tend to borrow money from markets before they lend .Am I wrong in my thoughts ?
J_B.

bockster

Joe_Bloggs wrote:

If you overpay you may be entitled to a payment 'holiday' and/or build up a reserve that could be used as a defence against unforseen circumstances. You can often access your overpayments. J_B.

i would say that putting the extra money into the offset savings account still gives the option of a payment holiday by means of paying the mortgage with that saved money if neccessary. it just appeals to me to have more of your own money 'more easily' available in case required. in the meantime it is still keeping mortgage payments down by the same amount as overpaying.
just my opinion.

MM2005

Well, I guess if there is no monerary difference then if I go with saving it (rather than overpaying) I will have more choice on the mortgages available to me - as I want to overpay/save £1000 per month (and I know a lot of companies restrict the overpayment amount).

I will also have a choice on whether I could then pay off the mortgage at some point (with the savings) or contniue but possibly paying no interest, once the savings match/exceed the mortgage value.

Well, at least now when I look I don't have to worry about overpayment limits - just need the best offset rate/deal I guess.

Thanks for your replies and help.

Cheers
MM

Daniel_B

MM, as already stated, there is NO difference between overpaying, or saving the money in your offset account - the net result is identical - only you have more flexibility with the latter option.

Just so you know, FD have no overpayment limits, and no clauses that say you can't have a £60,000 mortgage, and £60,000 in savings - thus having a £60,000 0% interest loan :-)

My personal approach is to do both - ie overpay AND save - works for me.

Cheers

Dan

MM2005

Thanks Daniel. I have looked at First Direct but there seems better rates out there to me (YBS, IF, etc.). You mentioned one thing which I hadn't thought of - I assumed all lenders allowed you to have the same amount in savings as the mortgage value. Is this not the case then?

MM2005

Right, I think I have decided on the Yorkshire BS for an offset. They have several different deals. The one I fancy is the 5 year fixed (at 4.84%). What do people think about that rate as a fixed? I know interest rates are forecast to drop (to what degree who knows of course!).

Also, I have 2 x e-ISA's with YBS - is it possible to offset these against the mortgage also (obviously forego the interest earned but keep the ISA 'status' for those years)?

Daniel_B

MM2005 wrote:

You mentioned one thing which I hadn't thought of - I assumed all lenders allowed you to have the same amount in savings as the mortgage value. Is this not the case then?

I expect they all do, but it didn't occur to me until after I had taken it out - I just rang them up for peace of mind that you were able to, and you are.

If you think that is likely to happen at some point, then I would check you definitely can before signing on the dotted line with your chosen provider.

Dan