How not to use an offset

MarkyMarkD

The Telegraph money section today has an example of a couple who haven't got a clue how to use their offset arrangement.

Despite having a huge income and property worth £250k, they have an £11,000 offset mortgage, with balances of around £8,500 offset. So far so good - they are only paying interest on £2,500.

But they also have personal loans of £6,000 and £17,000 cash in an appalling Halifax instant access account paying only 2.25%.

Hello????

If you are going to go for an offset, there's no point messing around. You want ALL your borrowing to be on the offset, and ALL your cash savings to be on the offset - unless they are in a TESSA or ISA getting a tax-free rate which is higher than your mortgage rate (which is fairly unlikely given that offset rates don't tend to be very competitive).

If you are going to mess around, as this couple are, with multiple accounts with different banks, you didn't want an offset in the first place.

david78

borrowings
Mortgage: £17,000
Personal Loan: £0

Savings
Savings in Offset account: £17,000
Other Savings (Preferably ISA savings): £8,500

Much better.

Walletwatch

If you are going to mess around, as this couple are, with multiple accounts with different banks, you didn't want an offset in the first place.

Very true - one may have reasons for having multiple accounts with different banks, but once you decide to go in for an offset, you need to relook at all your accounts and prune down on those that you'd rather have balances moved towards reducing your offset debt.

MarkyMarkD

Nicely tabulated, David.

I am sure that at least half the people who have offsets are mis-using them in this way, or are people who wouldn't save money with an offset (compared to an ordinary discounted mortgage) even if they did use it properly.

And, as David says, to have that much spare cash but £0 in ISAs is ridiculous in the extreme - unless all the savings are effectively tax-free because of being offset.

Sofa_Sogood

Is there a topic on how to use an offset as well?

Or are all the answers here or scattered about the board?

It might seem a stupid question from me, but not everyone understands what offsets are. I'll be honest and say I didn't know what an offset mortgage was, and only have a vague idea what they are now, since joining this forum.

MarkyMarkD

There are two main sorts of offset, although the distinctions are blurred.

They are both devices to reduce the mortgage interest you pay by offsetting savings or (sometimes) current account balances with the same bank.

The two types are current account mortgages (where the mortgage is like a huge overdraft, and the offsetting is done through paying money through the current account mortgage) and standard offset mortgages (where the money is kept in separate pots for mortgages and savings, but offset for interest calculation purposes).

Which you prefer depends if you need the security of "pots" of money to budget - some people find the idea of a £100,000 overdrawn balance showing on their current account a bit weird!

They are most worthwhile (and this is an extreme generalisation which others probably won't agree with) for those who pay 40% tax, and have substantial lumpy income and a significant level of cash savings compared to the size of their mortgage, but don't want to simply borrow less.

They are not as worthwhile for people who have smaller savings balances, pay lower/standard rate tax, and have regular monthly income, unless (and this is a big unless) they want to pay for the privilege because they can't be bothered to constantly keep remortgaging.

Most of the savings from offset products can be obtained more cost-effectively through flexible mortgages, without the complexity of an offset arrangement.

Sofa_Sogood

Thanks MarkyMarkD - I'm just reading my way though your reply hoping that most of it sinks in.

I've been trying to find ways of reading the book, and amalgamating it with advice given here for what I think might suit us, and offsetting seems a good route, bearing in mind my husband wants to (or needs to), retire early. In approximately two years time.

But we've both been a bit lackadaisical with money, my 'financial adviser' retired a couple of months ago - didn't even know I had one! So I've obviously been 'paying' for one?

Suffice to say our finances are all over the place. Some in ISA's, some in pensions, some in accounts that should be in ISA's, some under the bed :rolleyes: but you get the picture?

We're going to have to start from scratch I think, but our main goal looks to be to reducing the mortgage as quickly as possible. Which probably means having all monies going in and out of the same bank??

We probably need an IFA, but it's still good to familiarise myself with all the 'jargon' surrounding money.

Back to the book and the drawing board I think don't you?

david78

We probably need an IFA.

No no no. That will only cost you. Do your own homework. As MarkyMarkD says the offset route is good for people with a lot of savings. Typically you need between 30% and 50% of your mortgage balance in savings to make them better value than
the best mortgage you can find and the best savings account you can get.

our finances are all over the place. Some in ISA's, some in pensions, some in accounts that should be in ISA's

Diversity is a good thing.

Sofa_Sogood

david78 wrote:

No no no. That will only cost you. Do your own homework. As MarkyMarkD says the offset route is good for people with a lot of savings. Typically you need between 30% and 50% of your mortgage balance in savings to make them better value than
the best mortgage you can find and the best savings account you can get.


Diversity is a good thing.

Thanks david78.

I think I'd be best if I start with small steps. Hope you agree, because I'm lost

Can I just throw one 'for example' at you please?

There's £8,000 of mine sitting in a Halifax Saver Reward.

I'd like to put £3,000 of that into an ISA (which it should have been originally, but reverted back to a savings account because I 'forgot' to supply Halifax with my N.I. number. Ooops. Then take £3,000 as a bonus from work and put that into an ISA the day after. I think that's how I've read it in the Tips, and on this board? That £3,000 can be put in on the 5th April, and then another £3,000 on the 6th April.

That's a good start?

Or to reduce the length of the mortgage and not the repayments, should I pay some directly off the mortgage?