Mortgage Offset Question

PipPip

Quick question about how I should be thinking about the return on mortgage overpayments/offsets. My current mortgage rate is 0.85% above base rate so clearly cheap money today. My mortgage is quite large but set against it today I have a reasonable sum in an offset account. I am considering moving/investing the money currently in the offset account. However, the mortgage rate wont be cheap forever and I was wondering whether I am thinking about the rate correctly - should I really be looking at average expected rate over the 18 years of the mortgage remaining when comparing to returns I could generate from moving the offset cash?

Reaper

No. As base rates will certainly rise in the next 18 years you should only be looking at the situation now.

If you are really only paying 1.35% then why are you bothering with the offset? Move as much as you can out of your offset and into a savings account that pays more than that NET (after tax).

If future rate changes alters the balance back in favour of the offset mortgage then move it back again.

PipPip

Its a bit complicated. Mortgage started on a fixed rate of 4.85% and changed to 0.85% above base rate only recently (it had a 2 year fix then 0.85% above base rate for life). We've been in Paris for the last 3 years (coming back ths summer) so French tax residents meaning unable to use ISAs or pension contribution tax offset and not worth the hassle of moving the money to French tax shelters for a short time period. So the money has just been building up in the offset awaiting our return to the UK. Now I'm planning what to do with it when we get back (around £200k).

lisyloo

I have mine 50% in cash ISAs, 10% in NS&I savings certificates (currently not available) and 40% in S&S ISAs although you have to build up ISAs over a period of time.

should I really be looking at average expected rate over the 18 years of the mortgage remaining

Only if you wanted/needed to commit to investments/savings for 18 years which seems silly to me.

My personal view is that I would change my strategy when the situation changes.
So (for example) if BOE rates go up and RPI goes down then I might withdraw from the NSI and overpay the mortgage.
It's a simple comparison of the returns (r expected returns with S&S).

getmore4less

If you can find saving that track(there are some) above the base+0.85%(net) you limit the risk of timing moving saving when rates do move.

Its a constant monitoring situation for variable rates.

PipPip

I understand these replies. However, if I am looking to move the money into a stocks and shares ISA with an expectation that I leave the money there for 5 to 10 years (since equity is a mid to long term investment) then I should be comparing expected return with expected interest rate on the mortgage over the next 5 to 10 years and not with current rate. If I am moving into short term cash deposits then I agree the right comparison is current interest rate on deposits vs current rate on the mortgage but I am thinking of "investing" this money rather than "saving" it.

thenudeone

As I am sure you understand, there is a risk that even over a longish period of 5-10 years, stock market based investments will not provide better returns than cash.

Base rate tracking savings accounts are few and far between.

3-year fixed rate accounts are available paying 4% or more http://www.northernrock.co.uk/savings/Find/Results/Bonds/New
You could probably find government bonds that gave a better return.

I would be tempted to look at it on an incremental basis by asking:
a) What are the chances of the base rate rising so much in the next three years that the mortgage rate exceeds the savings rate? (Even if it does you will still be better off unless it rises so much that the average over 3 years is greater)
b) What return do I expect on risky market-based investments? 5% 6% What?
Is the excess of b) over a) sufficient to justify the risk required to achieve it?

dtsazza

lisyloo wrote: »

10% in NS&I savings certificates (currently not available)

How quickly things change.

atypical

getmore4less wrote: »

If you can find saving that track(there are some) above the base+0.85%(net) you limit the risk of timing moving saving when rates do move.

Secure Trust Bank's 183 day notice account tracks 3% above the base rate. That's 2.4% net - 0.85% = 1.55% guaranteed above the base rate.

There's a thread about it here somewhere. Someone called and they were told the guarantee would be apply for the life of the account.

lisyloo

How quickly things change.

Great isn't it.
I am hoping to get some more (once my current "at risk" status is resolved).

Loughton_Monkey

Take all your offset cash out immediately, and put it in Whiteaway Laidlaw at 6 month fixed rate (3.35%). Absolute guaranteed profit to be made - barring the most quick and unprecedented raise in Base Rates ever seen.

Use investments, then you are setting yourself up for a huge risk.