Offset mortgage accounts - Advice???

Brad1974

Am I missing a trick here?

In an offset mortgage account (first direct for £100,000) linked to an account of theirs with a deposit or £10,000. They tell me I only pay interest on the difference between the 2 i.e. £90,000.

Currently this £10,000 is sat in a ING savings account earnin interest at 4.5%. However I pay tax on this interest at higher rate, therefore the net interest is only 4.5 x 0.6 = 2.7%.

If the money is removed from the ING account inot the link account, wont I get the effective interest saving of the bank current variable rate of 5.5%????? That is effectivley doubling whaqt I currently get.

I appreciate that my 10,000 will never grow in size this way but the saving would be in not paying the interest on the mortage.

Is this right?????

stanmoresaver

Brad1974 wrote:

Am I missing a trick here?

If the money is removed from the ING account inot the link account, wont I get the effective interest saving of the bank current variable rate of 5.5%????? That is effectivley doubling whaqt I currently get.

Is this right?????

Yes you are missing a trick and are right- however, first direct are not the only provider to offer offset deals. (there'renot bad though!)

I suggest you either look at the whole of the market or engage a broker to do the same for you!

Hope this helps

SS

silvercar

You are right, your savings are working hard for you!

The downside is that you are paying a higher rate of interest on your mortgage than you could get in a non-offset mortgage. So there are swings and roundabouts. The sticky thread on offsets shows detailed calculations, basically you should be aiming to have a third of your mortgage offset to benefit if you would otherwise have most of your savings in high interest accounts and ISAs.

If you want the flexibility to take back your savings then it can work well if you are disciplined.

HelpWhereIcan

Sivecar is correct, the calculation should be done on an individual basis. I am not sure what calculators First Direct offer, but The One Account (who's rates are similar) have their 'shrink it' calculator which is IMO the best out there as at the end it shows the equivalent rate you would need to be paying on a standard mortgage to get the same benefit.

http://www.oneaccount.com/

Hope this helps

Joe_Bloggs

@HelpWhereICan

The One Account (who's rates are similar) have their 'shrink it' calculator which is IMO the best out there as at the end it shows the equivalent rate you would need to be paying on a standard mortgage to get the same benefit.

This is where the 'shrink it' model is misleading. There are not many savvy borrowers who would stick with the standard rate (SVR) of a lender for that period of time.
The Oneaccount are forthcomming in showing what they are making comparisons against. Unfortunately they are against the worst mangy products of a cross-section of high street lenders.
J_B.

HelpWhereIcan

Hi Joe

Joe_Bloggs wrote:

@HelpWhereICan
This is where the 'shrink it' model is misleading. There are not many savvy borrowers who would stick with the standard rate (SVR) of a lender for that period of time.

In many cases, the ability to offset and/or use fully flexible features can negate the need to remortgage regularly other than to get another offset deal offering a better rate. Even when this is the case, the comparison against a 'traditional mortgage' still stands.

The point of the calculator is to show that the effect of offsetting lump sums against your mortgage can be to reduce the equivalent rate you are paying on your mortgage, maximise the amount of 'work' that your savings are doing for you, and to compare this to the way a 'traditional' (non offset) mortgage works.

I am not endorsing the One account product as the best one, just the calculator, it's ease of use and the clarity with which it presents the case for offset.

Joe_Bloggs wrote:

The Oneaccount are forthcomming in showing what they are making comparisons against. Unfortunately they are against the worst mangy products of a cross-section of high street lenders.
J_B.

I am not sure what you mean by this. When I used the calculator (rather than looked at http://www.oneaccount.com/onev3/toa/toa-interest-ex.shtml /their FAQ?) it simply said:

"For a traditional mortgage over 18 years that has a total repayment of cost of £195,033, it would have to offer an interest rate of just 4.4% to save you the same amount as the One account"


This, of course, would be 4.4% for the whole term - that is the period over which the calculation of the benefit of offsetting is done.

IMO (if i really want to nit pick), the actual real failing of the calculator is that it does not take into account the amount you could earn elsewhere on your savings (net of tax of course) when calculating the rate required to compare it to. But, if they did that, they would then have to estimate the cost of remortgaging every 2 years to get the best possible deal on a traditional rate.

For some reason, I feel the need to declare that my offset mortgage is not with the One account but the Abbey which suited me better. All I have said is that the calculator is a good one and that the benefit of using an Offset mortgage (One account or not) has to be weighed up on a case by case basis.

BTW, so you can replicate my result if you want to, I used a loan amount on 135000 over 18 years with 13500 in savings to offset (the amount offset is more often than not the most influential factor in the result)

Joe_Bloggs

Thankyou HelpwhereIcan.
I can replicate the 'Shrink it' with my own calculations. It is illustrative of what can be done. It does cross many financial areas including mortgages taxation of interest, loans, credit card spending and savings. Their brilliant marketing makes them seem appropriate to everyone. I don't think they are. Were I to put my projected mortgage term in, modified due to allowed overpayments, then they are more expensive due to their higher interest rate. My savings can go into ISAs or overpayments it makes little difference as the rates are very close. I can get my overpayments and ISA contributions back.

J_B.
I do not feel the need to chase a remortgage every two years. I am a modest overpayer and will get rid of my present mortgage 8 years ahead of the term without the help of an offset.