Looking at remortgaging - offset mortgages?

eventer

Hi - I'm on a roll here, though feeling guilty as I am not likely to be able to actually help anyone with money issues, but I would like some more advice please.

My partner and I are in the process of remortgaging as our fixed rate mortgage will revert to being variable at the end of the month.

We saw a mortgage advisor who was recommended by my IFA the other day, and he suggested an offset mortgage, basically suggesting we overpay by #50 a month and save #40 or so a month - not massive amounts I know, but affordable for us. The reasoning being that if we had some catastrophy we could use the savings if needed, but if not we pay our mortgage off earlier thus saving money - hurray.

What I would like to know is simple really - are offset mortgages really a good idea? Or could there potentially be a better way for us to use our money?

Thankyou!

rossbenn

Depends on your tax rate as to how good they are. Do the maths.

eventer

Okay...that would imply that as a new user here I have missed something fundemental that I should be looking at...we're both basic rate tax payers - what should I have spotted that I clearly haven't?!

jamesd

It sounds unlikely that you will be better off with an offset mortgage. They are a nice idea but they typically have a higher interest rate than a flexible mortgage. That higher interest rate combines with the loss of savings income to make it quite hard to come out ahead unless you are a higher rate taxpayer or have savings exceeding about 10-20% of the mortgage amount.

Probably better to use regular saver accounts like that from LLoyds TSB or Alliance and Leicester instead to build up an initial emergency fund. Then, if your ISA allowances are available, you could put the money into cash ISA accounts. The highest-paying cash ISA at rpesent is 5.75% from Ruffler Bank and that rate has not yet been increased since the last Bank of england rate rise.

If the rates for saving are higher than the rates for your mortgage there seems little reason to overpay the mortgage.

Once your savings exceed the remaining balance on the mortage you could pay it off, or just continue to make more from saving than you pay on the mortgage.

If you remain interested in an offset mortgage I suggest that you ask your mortgage adviser to compare the offset product they suggest with the flexible mortgage product from the same mortgage lender. Ask them to ensure that they take into account the savings interest you lose from your ISA or savings accounts when you put the money into the offset account. I did the calculation a few months ago for a Woolwich offset mortgage and even the couple in their own example were worse off offsetting than if they hadn't.

eventer

Thanks jamesd - I have been sceptical about this from the start for no better reason than my gut instinct was that it didn't sound like the best way to do things. However, when your mortgage advisor tells you it's what he's doing, you do tend to blindly believe him.

I think that we clearly need to look into this in more detail (arrrgh, who exactly am I meant to trust then?!!)

loveandlight

Originally posted by eventer
(arrrgh, who exactly am I meant to trust then?!!)

Originally posted by eventer
I have been sceptical about this from the start for no better reason than my gut instinct was that it didn't sound like the best way to do things.

There's your answer!;)

roswell

If you have 0 saving a offset wont be for you, Another danger of offset is if you happened to a mass say £10 k in savings and then lost your job you wouldnt get benifits as your savings would exceded the upper limits. i which case you are expected to live off your savings till they are below the limits which negates the savings in the first place.

if your not planning on moveing anytime soon a 10 year fix may be a good bet and with some you can over pay which will reduce the amount of interest on the mortgage that you pay over the term. (Same effect as offfset just your savings arent there :-)

Supernova

roswell wrote:

you wouldnt get benifits

Apologies for going off topic here.

Do they take ISAs into consideration? And is it Income Support as opposed to unemployment benefit that is means-tested these days?

eventer

roswell wrote:

If you have 0 saving a offset wont be for you, Another danger of offset is if you happened to a mass say £10 k in savings and then lost your job you wouldnt get benifits as your savings would exceded the upper limits. i which case you are expected to live off your savings till they are below the limits which negates the savings in the first place.

if your not planning on moveing anytime soon a 10 year fix may be a good bet and with some you can over pay which will reduce the amount of interest on the mortgage that you pay over the term. (Same effect as offfset just your savings arent there :-)

Thanks for that - doubt I would get benefits anyway as I have some money invested which would exceed the upper limits.

Trouble is, we are planning to move in the next few years.

I can we need to do some more investigating on this one. Thanks for the help.

Rick62

I think Offset mortgages can be great products - BUT - probably not for just saving £50/month from regular earnings.

The premium is not so great now, so even with less than 10% in saving they can work, but the type of people I always recommend them to are people who get large irregular bonuses, self employed etc.

It also sounds like he is just foisting this product on you rather than properly discussing the options and letting you choose. If you are not comfortable with his 'advice' then speak to another broker, one who will take the time to properly explain the options to you.