Offset - is this right?

Ms_Sophia

Hello all.

I've got a question about offset mortgages I was hoping to could help me with please:)

If I can get a mortgage which is @ 2.04% and will keep my savings in normal savings account with 2.4% net interest - does it mean that I will be better off keeping savings separate? cause they would be earning more money in saving accnts than they could possibly reduce my mortgage interest in an offset mortgage.

Sorry if it seems a too simple question... I've tried a couple of calculators, incl. the one on this site, and it seems that with mortgage @ 2.04% and savings separately @ 2.4% net - the best is to keep them separate and not to offset.

Or am I missing something here?...

Joe_Bloggs

Assuming tax is paid on interest received from the savings account @20% then offet savings at 2.04% would be equivalent to 2.04 / (1-0.2) or 2.55% in a basic rate taxable savings account.
If a higher rate of 40% applies then it is 2.04 /(1-0.4) = 3.4%.
J_B.

Ms_Sophia

Those are my thoughts exactly So in this case offsetting @ 2.04% would be equal to 2.55% gross savings (assuming base rate taxpayer). As we can easily get 3% gross savings, then it's better to take this mortgage rate and keep the savings separately I guess...

InMyDreams

Ms_Sophia wrote: »

Or am I missing something here?...

Nope, you are dead right. I'm assuming that 2.4% net interest means that you have already taken account of the tax payable (if any) on the savings interest, and 2.4% is what you are left with. {Edited - cross posted, I see you've confirmed that you have }

The only downside is psychological. You think you have savings which you might be tempted to spend. You have to have strong self-discipline and treat this savings pot as 'spent' on the mortgage. Dipping into it is akin to remortgaging to release equity. Whilst much easier, you still have to think of it like that.