One Account mortgages

doctoremma_2

I am (or hope to be) a first-time buyer and want someone (who I believe) to simply tell me what mortgage is best for me. These One Account thingies look good. Seems that although the interest is higher, it's counteracted by shorter terms. How much shorter a term do you need to make this worthwhile? Anyone got one? What % do you leave in your account every month to make it cheaper? Any other advice about them?

brannyrhino_2

The following was a previous answer to a similar question bit complicated but it might help!!!


Since interest rates have moved on from there, I thought I would provide a formula which anyone can use to plug in real numbers at any time and make the calculation.

To define terms:
OffsetRate -- this is the interest rate you pay on an offset mortgage.
NonoffsetRate -- the interest rate you pay on a non-offset mortgage (generally lower)
SavingsRate -- this is the rate you can get on your savings -- AFTER taxes
X -- this is the breakeven point. If you have more than X percentage in savings, you will be better off with an offset mortgage, less than X you are better off with a normal/flexible mortgage.

The left side of the formula is the annual percentage interest you will pay with the offset mortgage. The right side of the formula has two terms. The first is the interest you will pay on your non-offset mortgage, the second is the interest you will receive on your savings.

(100-X) * OffsetRate = 100 * NonoffsetRate – X * SavingsRate
simplifying:
100*OffsetRate – 100 * NonoffestRate= X * OffsetRate – X * SavingRate
solving for X:
X = 100 * (OffsetRate-NonoffsetRate) / (OffsetRate – SavingsRate)

Obviously, the greater the difference between the rate of the offset mortgage and the best mortgage you could get otherwise, the higher the percentage has to be. The more favourable your after tax savings rate, the higher the percentage has to be.

One of the big advantages of an offset mortgage for some people is that they run very large amounts through their current account each month, and this is set off against their mortgage, even if only for just a few days. Since current account rates are significantly lower than savings rates, to reflect this situation the formula has to be more complicated.

Two more terms:
CurAcctRate -- the interest rate you earn on your current account balance.
Y -- the average collected balance in your current account over the course of the year, as a percentage of your mortgage balance.

On to the formula:
(100-X-Y) * OffsetRate = 100 * NonoffsetRate – X * SavingsRate – Y * CurAcctRate

Solving for X:
X = (100 * (OffsetRate-NonOffsetRate) + Y * (CurAcctRate-OffsetRate)) / (OffsetRate – SavingsRate)

X is the break-even point for how much savings you need if you have an average current account balance of Y. So you can plug in your own numbers.

Solving for Y:
Y = (100 * (OffsetRate – NonOffsetRate) + X * (SavingsRate – OffsetRate)) / (OffsetRate – CurAcctRate)

This formula is for when you know how much savings you have (X) and are trying to determine what average balance you need in your current account to benefit from an offset mortgage. Y is the break-even point -- more than Y, and you would benefit from the offset mortgage.

Caveat:
This obviously does not reflect differences in fees, the necessity to keep remortgaging to maintain the lowest rates, etc. It compares non-flexible mortgages to offsets. A flexible mortgage may be able to accomplish the same thing as an offset at lower price, if your money is in savings rather than your current account.

This also does not reflect the intangible benefit of additional flexibility that an offset provides. It is simply for crunching the numbers. It may be worth it to you, even if the numbers do not quite come down on the side of the offset, to pay slightly more for the extra flexibility.

This also does not take into account at all where the money in savings comes from. If you are a credit card tart and have significant funds from that source, it does not necessarily follow that they should be used on an offset or that they should be used on savings. It is simply a matter of crunching the numbers to determine the best approach.