Offset Pros and Cons

SavingTide

Hello, I would most welcome advice and comments on the following.
I am re-mortgaging for £45,000. My broker is recommending an Offset with Newcastle. It has low fees (around £125), and is a tracker (Currently at 5.5% factoring in the recent rate rise). It is also totally flexible, which is good since I want to overpay in the future. I could offset about £13,000 by cashing in cash ISAs. Most of these currently pay below 5.5%, (probably around 4.5% on avergage) although I note thay some ISA pay 5% or just over, but clearly I could only switch £3,000.
At first I quite liked the idea of paying interest only on £32,000 (45-13). But now I am beginning to have doubts, since essentially I am really only 1 per cent better off (the average 4.5 % rate on my ISA est vs 5.5 per cent rate on the mortgage) and am kind of tying up savings (Although I do have some other saving to fall back on)
My main priority is to pay off the mortgage quickly (esp since I am no spring chicken, and I do not want to saddle my dependants with debt in case I should cast off this mortal coil (although I am not planning to do this :rolleyes: )
Maybe I would be better paying off £13,000 and taking out a mortgage on the remaining £32,000 perhaps just with a fixed rate. Or should I leave my ISAs untouched (you do get a nice passbook with 2 of them - OK, I am just kidding about that bit, I know that is not a factor)

PLEASE any advice, I am really cannot decide what is best.
(I will be very grateful for opinions)

nrsql

>> I note thay some ISA pay 5% or just over
Probably nearer 5.5% after the rate rise.
>> but clearly I could only switch £3,000.
Why?

If you are around 4.5% on your cash isa's you should maybe look at transferring them all - check out any transfer charges.

If you take out the isa's you will have lost those years - you can't put it back in again.
Have a look at flexible mortgages if you want to overpay - can probably get a cheaper deal.
It's probably best to get a discount though (or fixed if you think rates are going to rise) and keep savings in a savings account until you can apply it to the mortgage.
It's difficult to get good value with an offset.

Check the difference in payments with a discount compared to an offset and see what the effect of overpaying by that amount is.

jamesd

The cash ISA limit is 3000 in new cash deposits each year. You can have any amount of past years with a single cash ISA provider, so you could consolidate all your past cash ISA except this year with the best payer.

The best cash ISA payer is currently the small Ruffler Bank which is paying 5.75% on it's one month notice postal account. It hasn't yet adjusted the rate after the base rate increase this month, so I expect it to be 6% within a month.

Since 5.75% is higher than your likely mortgage rate, if you move ISA cash to the mortgage or an offset account you do two things:

1. You lose money for the duration of the mortgage, because the mortgage interest saved is less than the ISA interest earned.

2. You lose the ISA tax benefit for later years.

Overpaying is similarly pointless, since you can make more money by putting the money into the ISA or regular saver accounts than you save by paying off part of the mortgage.

With the deals available today, assuming they continue, normal flexible mortgages without offset features or some of the deals are the best ways to go. Sad, but that's the result of the higher interest rates charged for offset mortgages.

For best financial results, just get the mortgage on interest only and pay the difference between interest only and repayment, plus your overpayments, into a cash ISA and regular saver accounts. If you reach the limits on those, then it's worth considering equity ISA contributions (perhaps into safe investments like bond funds) or overpaying the mortgage.

Do make sure that the mortgage accepts overpayments, ideally unlimited overpayments, just in case the situation changes substantially. That'll make it easy for you to switch plan if you need to.

It seems a bit strange that you can borrow from one bank and save money with others and make a profit but that's possible today. It's usually what the banks do to us, the other way around...

rjm2k1

Pro's:
Allow you to reduce interest paid on mortgage if you have any cash lying around not earning much interest.

Con's:
Large pot of easily accessible cash available, make sure you are disciplined enough to not touch it!

The big issue with removing your money from the ISA is that you lose the tax free advantage on that money forever. One possibility would be to use an offset provider who allow you to offset a cash ISA, you could transfer your ISA to them (assuming they allow transfers in). As long as the interest rate was about the same, you would benefit from reducing the interest on the mortgage, making it easier to pay off from wages, but also keep the money in the ISA tax free once the mortgage is paid off and it's no longer required for offset.

silvercar

Do you want the security that you can access your savings? If so then putting them in an offset seems a good idea. Remember that you will then have lower mortgage interest. If you are certain that you will not want the savings then looking for a lower fixed rate deal on your mortgage may be worthwhile.

For a relatively small mortgage like yours you need to be careful of set up charges and valuation fees.

SavingTide

I am really grateful for all the replies. This is the first time I have posted to this forum - and I am impressed about how quick and the quality of the replies. I have food for thought. I will post my reply in terms of what I decide soon. I am especially swayed by the argument (Jamesd) mentioned of just switching my savings to a better rate ISA. This would seem to offset the benefits of the offset (Pardon the pun!), but I definitely need to give this some careful thought!

SavingTide

Hi again, clearly it is better not to go for an Offset mprtgag if I am using cash ISA funds when I could tranfer these into an account paying higher.
I have never heard of the Ruffer bank, but Natwest is also paying 5.75% on its cash ISA and it allows transfers. So I may well transfer £13,000 from the less good ISA (M&S), Smile, Alliance and Leicster - I also have a Tessa only ISa - not sure if same will apply to it - I will need to check its current rate (Northern Rock).
Then for the mortgage, I will go for flebile one so I can start paying off (as suggested) if ISA rates dip below mg rate. I must say I find it surprising that I can get a lower mg rate than ISA savings rate - My initial assumption was the opposite.
Of course, could it be that some of these rates are just tempters and they will put the rate down? - OK, I guess what you may then say is that in this case you need to regularly re-visit and keep switching. So it will take discipline, but I see the logic and I can be saving something so it is worth it.
So that brings me back to what mrg. I may end up just sticking to Nationwide : they have a fixed 10 yr at 5.18% and fees £399.
It might make sense for me to fix for a longer period since the fees get onerous if I keep switch on a diminishing balance.
It offers some flexibility - overpayments of £500 a month, I guess that allows me enough room to transfer in if ISAs go down significantly after a few years.
What do you think, does above make sense? :beer: !! (and a mortgage calculator)

SavingTide

Oops, sorry, it is 4.75% not 5.75% (Working too late so I am clearly hallucinating:eek: )
Looking at the list of ISA on moneysupermarket, most are not above 5.5%, so offset still worth considering.
But again, I do lose the tax free savings part - but does that really matter if I am making money on the deal.
OK, I better go and think about it again!!
(If you have details of this rough, er sorry, Ruffer bank I would be interested, could not find it on google (But probably for same reason as above!!)

SavingTide

OK, found it(Spelling - told you I was working too hard on this!!)
Yes looks good, it now has a min investment of £15,000 but this can be partly transfers, so I just need to find £2000 which I can from a Tessa only ISA.
OK, this looks good, I guess. But I think here we need to be careful to see that it is not likeLy to quickly go down!

jamesd

That new announcement that "As a response to the significant recent interest in and take up of our ISA savings product we have had to increase the minimum investment to £15,000" seems to be the MSE effect. Ah well. This may also mean that they won't raise the interest rate from 5.75% to 6%, since there's no reason to do that if they have enough money to lend.

Good to hear that it's still low enough for you, even though it's now out of the reach of many, since that's five years of cash ISA savings.

For others, the NS&I Direct ISA paying 5.55% is the one to go for for the current year but doesn't accept transfers in. The next option is the Kent Reliance Building Society but it only pays 5.21% and it's not so easy to get a mortgage costing less than that. Yearly rates availble are 5.40% but with rates likely to rise that may not be a good idea, though it will take two rises to beat it.

Ali120604

The offset mortgage is a good idea if you think you might need extra money in the near future as you effectively get it at the same rate as the mortgage which is cheaper than a loan. However it sounds like you wouldn't be thinking of this option if you want to pay it off sooner.

Also, it's not just your savings element of £13k which you are offsetting, I suspect the Newcastle will want you include your current account in the set-up and therefore every penny in there will also reduce the mortgage balance meaning you will pay less interest when you have income flowing into the current account and increasing when you spend that income.

The interest rate seems fine - just consider what interest rates might do in the future. If you think they will rise, you might be better to hedge your bets and go into a fixed product. If you are happy with an interest tracker mortgage then this offset mortgage is good as you can make additional payments which will reduce the interest as the outstanding balance is less and in turn will help you achieve the goal of clearing your mortgage sooner.