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

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 to buy a nice new car 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? :confused:

Thanks!
Mr Nice_guy

Replies

  • WestonDaveWestonDave Forumite
    5.2K Posts
    Rampant Recycler
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    First Direct SVR is currently 3.69% on their offset so in terms of rates you could have the best of both worlds.

    Your understanding is correct - your accounts are pooled for interest purposes and interest is only charged on the net amount borrowed after deducting any savings balances. The one thing you have to watch is that if you have more savings than borrowings you won't get anything on the excess - in other words it doesn't work in reverse.

    Again on the First Direct one there is not normally a set repayment amount - the conditions are that you must clear the interest each month and you must repay it by the time you reach 65 (or when the elder of you gets to 65 if its a joint mortgage). You can pay as much or as little off within those conditions as you choose, and at any time you can borrow back up to your original limit. The downside to this is you need to do your own sums (they do have online calculators and will help you on the phone) and be disciplined. In your case in order to "pay off" you'd need to have as much in your linked savings accounts (excluding any company money) as you have outstanding on the mortgage.

    One word of warning - as I understand it you cannot "borrow" your companies money interest free without incurring a benefit in kind charge to tax by HMRC. You will need specific tax advice on what you are proposing. That said even without this, given a choice of 3.69% on a normal variable rate or tracker mortgage and the same rate on an offset, the offset will always win just because your salary will be offseting and saving you money.
    Adventure before Dementia!
  • dimbo61dimbo61 Forumite
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    Well I have an offset mortgage and savings in the offset accounts as well and I therefore pay much less interest each month and much more capital off each month.
    How the TAX man might feel about this I have no idea.
    I take it you are self employed ( not borrowing from your employer !! )
    I think offset mortgages work best for people who have lots of money in savings or going through there buisness each month.
    Where do you save your TAX money until you pay the tax man and what interest do you get on it ( do you pay TAX on the interest earned ? )
    Offsetting £30k against a £113k mortgage is a good start but rates can be higher for an offset than a normal repayment mortgage ( check out first direct tracker )
    This is only my view on offsets
  • dimbo61dimbo61 Forumite
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    Why 2 year fix ?
    are you planning to clear your mortgage in 2 years or do you like paying arrangement fees, survey fees,solictors fees,chaps fees etc
    Think long term rates have never been so low I am fixed for 5 years only wish it was 10 !!
  • We've been offset with NatWest since 2006; works well for us (details in my thread so I won't repeat here). I find the offset of the current a/c very useful now we're in the final stages as it is a significant % of the capital. A few downsides to NatWest are; can't offset Cash ISAs and the facility reduces over the term of the mortgage.

    Run the calculators etc; I also allow for the effective interest rate in my household budgeting spreadsheet which gives you data on the balance of interest saved from offsetting vs that lost as the savings etc aren't earning interest. Drop me a PM if you want this so you can extract for your purposes.

    In summary, sounds like the £30k would be well used in offsetting right now.
    Good luck
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