Offset Motgage - Quick Query

mark99

Here is a newbie question - Lets say I have £100K savings. I also want to take out a £100K mortgage (I still want the £100K savngs accessible in case of dire emergencies).



If I put £100K in saving account at 3% interest rate, I get 3% interest less tax. I use this interest to help pay off a £100K repayment mortage.

If I take out an offset mortgage for £100K at 5% and put all £100K savings against this loan, then the 5% repayment all goes into repaying the capital off the £100K.....

So my £100K is working harder in the offset than the 3% interest payment I get from savings.

Unless the assumptions above are flawed.........

I'm sure I must be missing something here.

Mark

Gorgeous_George

Yes, you would be fully offset effectively earning 5% after tax.

On an Interest Only mortgage, you'd pay nothing (or almost nothing). On repayment, you would be paying just the capital but you'd have to reduce the savings each month to ensure they do not exceed the remaining balance.

GG

getmore4less

Partialy Flawed thinking.

The money is not working at all with 100% offset it is neutral(which is the same as having no money because you bought with cash.
In ths case the rate is irrelivent, 10% is working no harder than 0% or 5%.

in case 1. it depends on the relative interest rates after tax that is important.

At the moment with a cheap offset it is possible to have savings that pay a bit more than the mortgage rate so that money would be working harder than the offset, money that is earning less not so.

Finding somewhere for the full 100k that pay higher saving rates is not easy needs a mixture of ISA and monthly savers.

FD fee free offset at 2.79%, ISAs are over 3%,
20% tax you need 3.49% not a lot if any paying that mainly the monthly savers
http://www.moneysavingexpert.com/savings/best-regular-savings-accounts

dwsjarcmcd

Accepting getmore4less's point, I am doing what you outlined right now. I work away from home during the week and have considered my options as being
- Continue to stay in hotels (not really an option)
- Pay about £550 - £600 per month to rent somewhere I will only stay 2 - 3 nights a week
- Use capital to fund a property, which would lose about £120 per month net of tax. I am using an offset mortgage as a contingency and to allow flexibility.

Result, I save £400 plus per month based on the other options

David

getmore4less

dwsjarcmcd wrote: »

Accepting getmore4less's point, I am doing what you outlined right now. I work away from home during the week and have considered my options as being
- Continue to stay in hotels (not really an option)
- Pay about £550 - £600 per month to rent somewhere I will only stay 2 - 3 nights a week
- Use capital to fund a property, which would lose about £120 per month net of tax. I am using an offset mortgage as a contingency and to allow flexibility.

Result, I save £400 plus per month based on the other options

David

What does it look like once you factor in the buying selling and running costs.
Longer term you then have to factor the CGT(allthough for now that is not gong to be an issue with stagnent prices).

Did you look at short term lodger or discounted hotels devere venues,traveodge,premier and, holiday inn 2-4-1.

dwsjarcmcd

getmore4less wrote: »

What does it look like once you factor in the buying selling and running costs.
Longer term you then have to factor the CGT(allthough for now that is not gong to be an issue with stagnent prices).

Did you look at short term lodger or discounted hotels devere venues,traveodge,premier and, holiday inn 2-4-1.

Yes I did factor these in. Buying costs are minimal, a FD tracker with no fees and a cashback of £100!! Legal fees will be around £700, so made up within 2 months.

I guess some are a lifestyle choice in that I don't want to live in a hotel for the next 5 or so years and don't wanta room in a shared house. Running costs are the same whether rented or bought. I haven't really investigated the CGT issue yet - I'm not sure what the impact will be as I will be living there but by definition I would have made a profit, which wouldn't be the case with the alternatives.

mark99

So just to keep it simple (for me!) - using my original figures and examples above in post 1, it's better to offset as long as I keep reducing the offset pot (£100K) down each month to exactly balance the outstanding amount and use the interest "gained" from the offset to pay off the mortage capital? .

It still sounds almost too good to be true... basically you use your savings to generate an income bigger than available by any easily available savings account as long as you use the offset "income" pay off the loan and keep balance = loan outstanding.

Rgds

Mark

deedee71

Bear in mind some (though not all) offset products have a "floor", meaning you still pay interest on say £30,000 for the first 3 years. This is in the small print of my own offset product.

getmore4less

mark99 wrote: »

So just to keep it simple (for me!) - using my original figures and examples above in post 1, it's better to offset as long as I keep reducing the offset pot (£100K) down each month to exactly balance the outstanding amount and use the interest "gained" from the offset to pay off the mortage capital? .

It still sounds almost too good to be true... basically you use your savings to generate an income bigger than available by any easily available savings account as long as you use the offset "income" pay off the loan and keep balance = loan outstanding.

Rgds

Mark

You don't gain anything. (infact is costs you money to set up the mortgage)

Look at you example £100k say over 20years.
1. buy the house for £100k, 1 house, no money

2. £100k offset, 1house £100k cash, £100k debts + a bill to set up the loan.

20 years later

1. no change.
2. same positoin as 1. (if you paid the fees).

The only difference is you have access to the money(reducing) at the mortgage rate for 20years.

mark99

getmore4less wrote: »

You don't gain anything. (infact is costs you money to set up the mortgage)

Look at you example £100k say over 20years.
1. buy the house for £100k, 1 house, no money

2. £100k offset, 1house £100k cash, £100k debts + a bill to set up the loan.

20 years later

1. no change.
2. same positoin as 1. (if you paid the fees).

The only difference is you have access to the money(reducing) at the mortgage rate for 20years.

Ah this is the bit that's confusing me. Thanks for this example but consider this.

Lets say the btl mortgage rate was 5 %. Giving me having to make a monthly repayment of £416 (£100k*5% divided by 12 months) if I was 0% offset.

The mortgage guy said that I had still had to pay the monthly repayment (£416) even IF I was fully offset. But by being fully offset, this £416 would be paying off the capital (reducing the £100K) each month by £416K.

Now <ignoring tax> say I can only get 3% interest in any decent savings account ... this 3% yields £250 /month (£100k*3% divided by 12 months) .......

I would be better off letting the £416/month pay off the capital rather than £250/month - surely? all I'm doing is putting £100K into an offset rather than a savings account.

I still think I've missed something here as it appears too good to be true. lol

Many thanks

Mark

getmore4less

mark99 wrote: »

Lets say the btl mortgage rate was 5 %. Giving me having to make a monthly repayment of £416 (£100k*5% divided by 12 months) if I was 0% offset.

The mortgage guy said that I had still had to pay the monthly repayment (£416) even IF I was fully offset. But by being fully offset, this £416 would be paying off the capital (reducing the £100K) each month by £416K.

So you then take £416 out of the offset(to ovoid going over 100% offset) net cost from income zero.

or you just make the payment from the offset pot keeping the £415 and saving it so it is exactly the same as if you bought with cash

As I said before it makes no difference what the rate is because you have not borrowed any money.