offset/non offset

hi123

i know this discussion has been going for a while,i am remortgaging in oct 2006
need to borrow 160k with ltv of 58%
best offest rate offered is stepped tracker thru l&c with average rate of 4.97% over 3 years(variable) with a fees of 398£
is there a way to calculate cost over 3 yrs as i will need to pay halifax around 200£ for release etc,so the total cost of moving will be about600£
the difference in rate of interest comparing to non offeset will be 0.5% ,ie over 3 years it will be about around 2400£
how much offset will i need to balance the two,looks a lot

jamesd

Ignoring fees and assuming 800 a year in interest to save, you'd need to offset with about 16,000. Add another 4000 to cover the costs at 200 per year. Expect this sort of calculation from a site promoting offset mortgages.

However, this ignores the lost savings interest on the offset amount.

At a gross savings interest rate of 5.1% from the Coventry Building Society, 4.08% net of basic rate tax, the effective gain of ofsetting isn't 4.97% but 4.97% - 4.08% = 0.89%. At 0.89% gain from ofsetting, you'd need to offset with about 112,000 to cover the 1,000 mortgage interest difference and fees.

Things improve for a higher rate tax payer. There the after-tax interest rate from savings is 3.06% and the gain from ofsetting rises to 1.91%. The offset amount in this case is 52,400.

You might also find it useful to evaluate a flexible mortgage that allows you to overpay and withdraw the overpaid funds. The interest rate for this would probably be lower than the offset interest rate and that would reduce the interest rate cost you need to cover from ofsetting. If you were able to obtain such an account at 4.69% the lost interest would be only 0.3% or about 480 per year or 680 including switching costs. For a higher tate tax payer the effective interest rate benefit from ofsetting would be 4.69% - 3.06% = 1.63%. The offset (overpaid) amount to cover that would be about 42,000, a substantial improvement on the more costly offset product. You'd see little improvement for the basic rate case: 0.61% effective interest rate, offset amount required 111,500.

If you were able to obtain the offset/flexible mortgage at the same 4.49% interest rate as the regular mortgage, you'd need to offset with 14,000 to cover the switching costs as a higher rate tax payer, 49,000 as a basic rate tax payer. Ignoring lost savings interest this would be just 4,450 offset for both cases, but that's not the real picture, since you do lose that savings interest.

Don't expect sites promoting offset or current account mortgages to include the effect of lost savings interest or their higher interest rates in their illustrations.


If you must remortgage anyway, it's unfair to include the 600 in costs here, since those fees are really part of your costs of the mortgage you're leaving. You should just include the difference in costs between an offset and non-offset mortgage.

hi123

thanks jamesd for very comprehensive review
it has confirmed few things for me
i am a high rate tax payer,and dont know what halifax ie my current provider will offer when my current rate ends in oct. they seem to say to wait till september. their flexible rate are around 4.29% but i doubt if they will offer the same for a remortgage,if they dont then i have to move elsewhere
i can offset around 35k

hi123

hi
troubling u again
is there any broker who offer special rates ie exclusives on one account/natwest one

MortgageMamma

what do you mean by discounts? I have just sold a one account flexible mortgage to a client last night, they are great for people who prefer to reduce mortgage than gain interest on savings. Have you had a look on their site at their savings calculator?

jamesd

MortgageMama, I've used the Natwest offset calculator and found it misleading at best, since it gives an inaccurate picture of the overall situation of the client while claiming to take loss of savings interest into account. It's better than some in that it at least gives some hint that savings loss is a factor, so kudos to Natwest for that.

The One account savings calculator doesn't factor in savings interest loss at all, or disclose that all the savings, including any savings in cash ISAs, say, are assumed moved to the account, so that's less helpful.

These, and all others I've seen so far, look like fruitful ground for future mis-selling actions to me. Frankly, it seems negligent not to use sensible savings interest loss calculations for a product that relies on shifting savings to an offset account.

I do hope that you're using somewhat realistic savings loss estimates when comparing and selecting appropriate products for your clients. You're one of the helpful people and I wouldn't like to see you caught up in that sort of mess.

hi123

thanks again jamesd
u have confirmed what i was thinking about offset calculators and the advisor i have had discussion.
i have had someone from me smarter mortgage visit me on 5thjuly,took some details so that he can look for the best offer for me and next i find that i have an account with if already setup with lawyer nominated as well and the charges for this as 2995£.all this was done without my knowledge or discussing with me as to what i wanted.is it usual!
have u any opinion as to service of first direct and intelligence finance
these are the only two decent rates available
one account seems much higher rate ,unless i can find some one who offers exclusive deal for them

jamesd

hi123, I'm just another consumer, not a professional in this area and I have no experience with those products. I suggest searching the message boards for IF and for "intelligent finance". Their products do appear to be fairly competitive and interesting and they do seem to have some happy customers posting here.

jamesd

The One Account is significantly more costly but you need to consider whether its great flexibility, including stopping and starting payments and withdrawing overpayments instantly whenever you feel like it is going to deliver you a convenience or flexibility benefit that makes the cost worthwhile for you. It works pretty much like a bank account with a huge ovedraft, so it is extremely convenient. That great flexibility has won it some firm fans, not least those who have lost and changed jobs several times during their mortgage term.