Offset Mortgage.......help! :)

Nice_guy

Hi Guys,
:beer:

Just found this site, such a wealth of information, by FAR the best site out there! This is my first post (of hopefully many) and was looking for some advice.

We bought our first home two years ago and our mortgage is coming to the end of a 2 year fixed deal at 5.59%. After speaking to our current lender i'm confident that we can go on another fixed rate deal for 2 years at 3.69% saving us roughly £120 pm (natwest).

However since buying our home we have managed to save 30k. My plan was [strike]to buy a nice new car [/strike]to pay this as a lump sum off our mortgage (want to start a family so have to be sensible!). But lately I have been looking at offset mortgages and am now wondering if this is a better option considering my circumstances.

From what I understand an offset mortgage only charges interest on the outstanding balance of your account, but the monthly payments are always based on the initial sum borrowed. Therefore this basically means providing you have decent savings you'll save on interest while also overpaying your mortgage each month, paying less in the long term while also cutting years off your mortgage. Have I got this right?

Now this is where this gets interesting..........
My outstanding mortgage is currently 113k. If I paid 30k off I would have 83k outstanding. Now if I had 83k in savings would this mean I would get charged interest on 0 as this would be my balance? Effectively meaning that my monthly payment will go 100% towards paying my principal sum borrowed?

Now I know the above example is based on having 83k in savings, but even if had 40k instead of 83k would this not be worth considering? Or should I stick to the revised fixed two year deal at 3.69%.

The money I would use as savings (to offset) will come from my company account. I have always kept a high-ish balance in my company (for expansion etc) but never thought that the money was working hard enough to my advantage. By using my company money to offset as savings against my personal mortgage this would keep the company money flexible (i.e. if the company needed it back for any reason) while also reducing the interest paid on my mortgage as well as the term.

Thoughts please?

Thanks!
Mr Nice_guy

Trying_to_be_good

Hi - this is a good walk-through of offsets: http://forums.moneysavingexpert.com/showthread.html?t=471

You're right that you only pay interest on the balance of mortgage outstanding less savings offset, so £83k mortgage and £83k savings = no interest.

Not sure on the tax position of using a company asset to reduce your personal mortgage - smacks of a benefit in kind (a loan to you from the company) to me, and might be taxed as such. Not to say it still wouldn't save you money!

Nice_guy

Hi 'Trying to be good',

Thanks for the reply.

I'll have to ask my accountant about the in's and out's of using the companies money to offset my personal mortgage. In saying that I know I could take a dividend for the 83k, and then I will be free to use the funds as I wish. This would attract personal tax as my income for the year would have rose by 83k. However if I pay the money back to the company before the tax year end I don't think I will be charged tax on it. Then at the start of the new tax year I'll take a dividend for the 83k again and so on and so on..... I'm not 100% sure if this would work, but it sounds reasonable enough (using my limited knowledge!)

It worth further research, I'll let you know what I find out. I suppose if my plan is viable then the interest rate applied to the offset mortgage is somewhat irrelevant.

So it sounds like it will save me interest, cut my term, and keep my money flexible. Sounds a little too good to be true at the moment!

Thanks for your reply again,
Nice_guy

surreysaver

Each offset is different. I have one with Abbey, and I get charged the full amout each month, regardless of how much is in my savings pot. What happens is each month I get money added to my savings pot equivalent to the amount of savings, so you can actually see how much you've saved.

Nice_guy

So are you saying the money you have effectively overpaid is credited to your savings account?

surreysaver

Nice_guy wrote: »

So are you saying the money you have effectively overpaid is credited to your savings account?

Yes, I am saying that.

Nice_guy

Ahh I see, wouldn't you want they overpayment to go towards the principal sum borrowed? That way you'll be cutting down on the term of the mortgage. I thought this was one of the big benefits of the offset mortgage. However I suppose it all depends on what your circumstances are

Nice_guy

MrMicawber_2

If the offset works in that way just accumulate the extra savings until you have enough to make a capital repayment, and then ask for the term or the monthly repayment to be reduced.

Whether or not you take an offset mortgage will still depend on the interest rate you can get.

surreysaver

Nice_guy wrote: »

Ahh I see, wouldn't you want they overpayment to go towards the principal sum borrowed? Nice_guy

As long as I don't spend the money, it doesn't really make any difference, does it? And if it is in the savings pot, I can remove it and put it in a savings account that pays higher interest than I'm paying on my mortgage.