"Offsetting is just a gimmick"?

adifferentmartin

I picked up the title quote from a previous thread (but not sure where now) and I'm still trying to figure it out. I think I’m pulling together strands from a few different previous threads.

I need to re-mortgage because I'm on a rubbish short term rate (6.3%) but no tie in with Halifax. But I also have £40,000 savings in ISA at 4.75%. Mortgage loan is £82,000 interest only with a separate endowment - 20 years left to run on both.
We were originally advised 5 years ago to "maximise our borrowing" because it was "so cheap" and to invest our savings and get 10% return (seems optimistic now).

I've been watching this site for a while and realised the error of my ways - you've convinced me to ditch the debt – but what's the best way to do it? Since we’re currently paying around £430ish per month, I was thinking to set my monthly payments around £450-£460 in order to start over paying. I have tried most the calculators identified on this site but they don’t ever quite seem to do what I need and I've found it difficult to do the calculations myself particularly getting the capital balance with overpayment.

I've identified three options reached the following summary and would welcome the advice of this site's collective knowledge, particularly if I’ve got the calculations wrong, or missed something fundamental.

Option 1 Maintain debt and savings - Woolwich Lifetime tracker (5.29%)
Mortgage Loan £82000
Interest Rate 5.29
Interest payment 361.48
overpayment 98.52
Total monthly payment 460
Total payment over 2 years £11,040.00
application fee £0.00
redemption fee £225.00
total paid (A) £11,265.00
Capital balance after 2yrs with overpayment £79,474.82
Capital reduction (B) £2,525.18
interest paid (A-B) £8,739.82
Interest on savings @4.75% £3,098.00
Balance cost (A-B-C) £5,641.82


Option 2 Offset savings agasint debt with 1st direct (5.33% 2 years)
Mortgage Loan £82000
Interest Rate 5.33
Interest payment 186.55
overpayment 275.45
Total monthly payment 462
Total payment over 2 years £11,088.00
application fee £399.00
redemption fee £225.00
total paid (A) £11,712.00
Capital balance after 2yrs with overpayment £75,078.00
Capital reduction (B) £6,922.00
interest paid (A-B) £4,790.00
Interest on savings @4.75% £0.00
Balance cost (A-B-C) £4,790.00

Option 3 Reduce debt with savings - Woolwich lifetime tracker (5.29%)
Mortgage Loan £42000
Interest Rate 5.29
Interest payment 185.15
overpayment 274.85
Total monthly payment 460
Total payment over 2 years £11,040.00
application fee £0.00
redemption fee 225
total paid (A) £11,265.00
Capital balance after 2yrs with overpayment £35,030.00
Capital reduction (B) £6,970.00
interest paid (A-B) £4,295.00
Interest on savings @4.75% £0.00
Balance cost (A-B-C) £4,295.00

On the face of it, over the short period of 2 years at current rates, Option 2 (offset) would give an overall saving of £851 over option 1, but paying off part of the debt (option 3) saves an additional £500. PResumably these savings continue eyar on year. One advantage to the lifetime tracker is no further application fees to pay after two years whereas I would need to re-mortgage again on the offset to maintain the best deal.

I’ve done the numbers based on digging out’s calculation http://forums.moneysavingexpert.com/showthread.html?t=471
and offsetting seems to stack up. But I’m not sure about moving savings from ISA to a standard savings account. This might not matter in the short term but I have a feeling that I’d be losing out on future tax-free allowance. Should I be looking for an offset with an ISA? Or is this just getting too complicated? The only other complication is that we’re considering building an extension so might actually need access to savings/additional cash in perhaps 12 months time. I also find that having access to savings provides a sort of comfort blanket/safety net so I might find it hard to use all the savings but clearly some of it could go.

My wife works part time and we’re both basic rate tax payers, although I’m gradually getting closer to the higher tax bracket.

Sorry to waffle so much but setting it all out has actually clarified it in my head a little.

I’d welcome any thoughts, observations or advice.

Antj29

there is one thing wrong with this site sometimes, or at least peoples ideas, they actually become to detailed,

For someone who is worried over the above decision i am surprised you are actually taking a variable rate.

Please bear in mind the porcessing times with the Woolwich as well, not the fastest on the market.

Also you may want to check out the ING direct Mortgage, fixed at 4.99 for 2 yrs and then base plus 0.3% for life, bloody amazing, but only available direct ( which annoys me as a whole of market adviser)

AndyWallace

Antj29 wrote:

Please bear in mind the porcessing times with the Woolwich as well, not the fastest on the market.

I would have agreed with this until last week, but my experience may be a one-off, who knows? My past experiences with the Woolwich have seen slow processing times and thus a tendancy to lean towards other providers.

However, I had a BDM visit a fortnight ago who said they had 'improved' on the processsing times. I was unsure but nevertheless a client's circumstances led to one of their products so I decided to see for myself.

I submitted a paper based application on the Tuesday and the offer was made on Friday afternoon. First Time Buyer.

Like I said, it may have been a one off, but I've got to say I am impressed by this.

Andy

toonfish

AndyWallace wrote:

I would have agreed with this until last week, but my experience may be a one-off, who knows? My past experiences with the Woolwich have seen slow processing times and thus a tendancy to lean towards other providers.

However, I had a BDM visit a fortnight ago who said they had 'improved' on the processsing times. I was unsure but nevertheless a client's circumstances led to one of their products so I decided to see for myself.

I submitted a paper based application on the Tuesday and the offer was made on Friday afternoon. First Time Buyer.

Like I said, it may have been a one off, but I've got to say I am impressed by this.

Andy

Woolwich have definitely improved - let's hope it lasts as the products are excellent.

Regarding offsetting, it is a gimick, and an expensive one if you don't use it. For certain folk it work, mainy those with variable incomes, but in the vast majority of cases I would look for the cheapest mortgage, and the highest paying savings account.

Coventry have a lifetime rate at 5.1% no penalties - might be worth a look although this tracks their variable rate, not the base rate.

kenshaz

ANTJ29 Reminder that you require a signature if you are stating in your post that you are a broker as per the code of conduct.

EdInvestor

adifferentmartin wrote:

But I also have £40,000 savings in ISA at 4.75%. Mortgage loan is £82,000 interest only with a separate endowment - 20 years left to run on both.

I’ve done the numbers based on digging out’s calculation http://forums.moneysavingexpert.com/showthread.html?t=471
and offsetting seems to stack up. But I’m not sure about moving savings from ISA to a standard savings account. This might not matter in the short term but I have a feeling that I’d be losing out on future tax-free allowance.

Absolutely right to avoid losing any of your ISA , especially now the rules have changed and it's become long termr and more flexible.

However we could have a look at whether it's worth going on with the endowment long term.

Post some figs so we can take a look

Company it's with
Guaranteed sum assured
Declared bonuses
Surrender value
Monthly premium
Maturity date
Maturity projections

adifferentmartin

Antj29
I’m a major newbie to this - apologies if you think I’m over-complicating but I have learnt from this site that these things can be complex. I’m trying break out from my former naivety in finance and understand the issues.
I guess it boils down to this – do I pay off part of mortgage with savings or offset. I think I can work out the interest payments but not the capital reduction from overpayment. Most mortgage calculators will tell you how much interest you will save of the term of a mortgage but not the reduction in capital over a shorter duration (especially with interest only), in order to compare one option with the other. I can’t find a mortgage calculator that will let me consider the options of offsetting and overpayment and capital reduction. Closest I found was at smile.co.uk which does the capital calc but seems to give a slightly lower premium than other calculators. If my calculation is correct, and I’m not convinced it is, offsetting is good if you want to keep access to your savings. Paying off is better, if you can live with locking the savings away.

Edinvestor
I’m still struggling to figure out mortgages and you want to do endowments as well?
I’m not sure I know what all of these terms are - here goes
Company: Royal London – “Profitbuilder” UK Equity Fund
Guaranteed sum assured: £83000 (is this the same as the life insurance element)
Declared bonuses: 2% April 2015 and every three years thereafter
Surrender value: don’t know. Do I need to request this from provider?
The current plan value is pretty low since until this year only 23.9% of premium was invested. I think the rest goes to pay the broker’s hefty commission. After April 2006 105.1% of premiums are invested so should go up a bit quicker now. As of March 2005 it was a paltry £1122 despite paying in around £7500 in premiums.
Monthly premium: started at £175.78 increasing by 20% each year for 5 years to double the premium (something called investment accumulator) currently £281.23 per month.
Maturity date: April 2027
Maturity projections – not sure. Original projection was 3% required to meet the £82000 mortgage. I recently requested an illustration for maintaining the premium at £281 and it suggested 0.6% required to achieve £82000 but not sure I believe this.

The investment accumulator thing was optional but seemed a good idea at the time as I thought it would provide an investment vehicle and provide some protection against shortfall. But recently, I’ve been considering reducing the monthly payments, and diverting that money straight into the mortgage. Doesn’t matter if it underperforms slightly since I’m reducing the debt anyway.

Thanks for the offer of assistance
Martin

EdInvestor

Surrender value: don’t know. Do I need to request this from provider?

Yes. Though I doubt it's worth pursuing.

How on earth did you manage to get sold an endowment mortgage 5 years ago?

The low initial payments were the attraction, I assume.

jamesd

adifferentmartin, if that ISA money is in a cash ISA you can get 5.75% tax free from Ruffler Bank. Since that exceeds the new mortgage interest rate it wouldn't make sense to use it to pay off part of the mortgage. If you had that cash ISA you'd make 4732.25 in interest on 40000 over two years.

I'm puzzled by your savings interest calculation for option 1. You appear to have used an interest rate of only 3.8%. That happens to be 80% of the 4.75% rate. Did you perhaps deduct tax on savings from it by mistake? Interest on a cash ISA is tax free.

Correcting the Option 1 calculation with the current 4.75% rate changes the savings interest to 3890.25 and the balance cost to 4849.57. Using the Ruffler Bank ISA the balance cost of option 1 is reduced to 4007.57.

Since the ISA has a higher interest rate than your mortgage, the cheapest option to use the ISA to pay off the mortgage is to keep the ISA until its balance exceeds the remaining mortgage balance, then pay off the mortgage. Similarly, it's best to put any overpayments into the ISA, where they will earn more money than they save in mortgage interest.

For the endowment, the performance of the underlying investments is the key factor, as it is for a stocks and shares ISA. It shouldn't be hard at all to beat the mortgage interest rate of the mortgage over the long term so you could switch the endowment payments to sticks and shares ISA contributions and set up a portfolio of at least five, better 10 or more, funds using asset allocation.

Assuming that you accept equity value fluctuations, there's supposed to be an option to switch cash ISA funds to stocks and shares ISAs in the next Budget, so your most profitable long-term strategy is probably switching most of that 40000 to funds in a stocks and shares ISA, leaving only what you want as an emergency fund or some safe money.

Did you receive investment advice for that endowment?

1.5% for 20 years on 281 a month would get you to 78689 so if contributions are elevated and allowing for the current value, the needed return to pay off the mortgage is pretty low. Adding in the 1.5.1 contribution effect means 20 years of 295.31 at 1% takes you to 78488. Add in the current value and declared bonuses and 0.6% future return seems like a realistic target. Even a zero return on 281 for 20 years gets you to 67440.

Using only a UK Equity fund - what Profitbuilder seems to do - is a poor investment choice compared to asset allocation in a range of funds in different regions and parts of the market.

If you don't want to learn about asset allocation a new model adviser IFA who does a lot of investment business should be able to get you set up cheaply and manage the asset allocation regularly for you.

adifferentmartin

Did you perhaps deduct tax on savings from it by mistake?

Yes it is in cash ISA and I think you're right about the tax calculation.
suddenly offsetting isn't as attractive, especially when you consider the higher cash ISA rate at 5.75%.

Did you receive investment advice for that endowment?

How on earth did you manage to get sold an endowment mortgage 5 years ago?
The low initial payments were the attraction, I assume.

Yes, got advice from and IFA mortgage advisor. The attraction wasn't the low payments but I was advised it was a "such a good product" and that it was cheaper in the long run, and easier, to move house with an endowment. The advisor neglected to mention the comission he received - I only found that out later. Like I say I was a bit naive - still am really but a bit more cynical now.

If I understand you correctly, it sounds like the endowment is likely to pay off the mortgage, even with a reduced premium, but not really the best investment option. Should I consider ditching it despite the money already ploughed in?

new model adviser IFA

sorry if I'm being dense but what's a "new model adviser IFA"
I'll need to investigate this asset allocation thing but it sounds like it's a bit beyond me just yet.
One difficulty I have found is finding an IFA who is prepared to discuss/advise on mortgages as well as the investment/savings side. Mortgage brokers only really seem to be interested in the mortgage side - understandable I suppose, whereas IFA's seem to leave mortgages alone.
Perhaps I'm looking in the wrong place?

one last query jamesd - what is the "1.5.1 contribution effect" you refer to?
I'm coming to the conclusion that I shouldn't be offsetting but shifting the savings to either a better cash ISA or an investment ISA with asset allocation (need a fancy IFA for this). Also consider ditching the endowment and sticking the funds in a S&S ISA?

Thanks for you assistance gents. I'll need to digest this a bit to figure it all out.
Martin

EdInvestor

Sounds to me like you should

a) remortgage to a cheap conventional I/O mortgage
b)divert the additional payments from the endowment to overpay the new mortgage
c) Consider making a misselling complaint about the endowment on the grounds the sale did not follow the rules/the product was not matched to your attitude to risk.If successful use money to overpay mortgage further.
d) Find a higher interest rate for the ISA savings