Is Offset right for me?

Random_bloke_2

I currently have a mortgage with Egg and have about £75000 left to pay off. Mortgage has been running nearly 5 years and interest rate is 5.75%.

Due to a change in my income, I have accumulated savings of about £30000.

I am also self employed and a high rate tax payer. At the beginning of each month I am paid quite a lot (about £12k), and I can delay payment of most outgoings until the end of the month. This means it could be offsetting the mortgage for most of the month. I also pay my income tax every six months and so again this sits in my business account doing nothing.

With Egg I can just open a bank account with them and use this to offset without incurring any charges.

I feel offsetting would be beneficial for me and wondered if anyone had any thoughts/problems/better ideas before I go ahead.

Thanks

brannyrhino_2

Read the thread above

http://forums.moneysavingexpert.com/showthread.html?t=471

Joe_Bloggs

@Random Bloke
It is a pity that the Offset principle is marketed so widely to tempt those that cannot benefit fully from the advantages. Fortunately for you these schemes seem better than most other options. The rates offered seem poor and soon migrate to SVR . This is not a problem if you have significant funds that belong to others that would be earning a poor rate of interest after higher rate tax. You have to be able to work out the relative cost of staying put, or changing tack, to prove it makes sense to adopt a different approach.
J_B.

stub451

Sounds ideal for you random_bloke.

You could put the 30k in a new Egg Savings Offset account, and use Egg Money Manager to redirect excess funds from your other current account when you can. In the absence of a 'OneAccount' offering from Egg, this would seem the best for you.

I am going for an Egg Offset myself. As a high rate taxpayer, with stoozed funds and a redundancy payoff due soon it suits me too.

Whilst the 4.24% rate only lasts 6 months, before the 5.74% rate comes in, the advantage for me is no lock-in. With a cheaper offset, like Yorkshire, it is actually a 3 year discount where penalties apply in the initial period. As I am considering downsizing (and paying off the mortgage entirely) the Egg offer is better for me.

Other options I considered:
OneAccount. Downside: Higher rate from start. Legal and valuation fees to pay. Hassle of moving current account.
Abbey. Downside: Legal and valuation fees to pay if you don't want a tie-in.

Sofa_Sogood

Random_bloke wrote:

I also pay my income tax every six months and so again this sits in my business account doing nothing.

Hi,

I can't help with any info about offsetting, but just looking into it ourselves.

What I did want to say is ... like yourself we have what we owe the IR sitting in a bank account doing very little. However, we've been told that if we pay the IR the August payment now, it should pay more interest that many banks and building societies.

I'm still waiting for this to be double checked so please don't take this as being gospel. Maybe someone else can shed some light on it? I was afraid to post about it before because a) I'm still waiting for clarification, and b) I'm useless where money matters are concerned.

Good luck and I'll keep watching this topic. I'm worried we go down the offsetting route and regret it, but we're still picking up hints that people post here.

DiggingOut

Find out what rates are available for offset and non-offset and then just plug in the numbers in the formula linked to above. A big factor for you will be your average current account balance, from what you say.

Remember, in plugging in savings rate, to use after tax savings rate. If you are married and your wife doesn't pay tax, you can get a better rate by putting savings in her name.

I would worry about someone who goes by the name "random bloke" being married, though. Someone asks her, "Who did you marry?" and she says, "Oh, some random bloke." :eek:

Joe_Bloggs

@DiggingOut
It is good to read your words. I'm glad that you are at liberty to express yourself once more. You may want to edit your signature as the network server gremlins stole two of your hard earned and well deserved stars. You can always appeal against this injustice to Mr Webby.
J_B.

DiggingOut

Hi, J_B!

I can't be back as much as I used to, but occasionally.

I did notice the missing stars, and added a new paragraph to my signature that is about as valuable as what was there before....

MarkyMarkD

Although offset seems suitable for someone like yourself, I'm not sure it actually is.

It depends if you need that £30k.

If you don't, you should remortgage for £45k, using the £30k to reduce the amount you need. Then, with a mortgage of £45k and a maximum surplus cash fund of £12k, the offset calculator would doubtless show that it's not worth offsetting.

Indeed, if you have no accumulated savings (using them all to borrow less, as I suggest above), the offset calculator equation is easy. Offsetting is only worthwhile if (AverageCurrAcctBal/MortgageBal) > (OffsetRate - NonOffsetRate) / (OffsetRate - CurrAcctRate).

If you say:

AverageCurrAcctBal = £12k (and this is probably exaggerating)
MortgageBal = £45k
OffsetRate = 5.75%
NonOffsetRate = 4.75% (and you can easily get a mortgage cheaper than this)
CurrAcctRate = 2% (assuming net of tax)

LHS = £12k/£45k = 27%
RHS = (1%/3.75%) = 27%

Break-even!

So if you can get a current account interest rate net of tax greater than 2%, or a mortgage rate less than 4.75%, offset isn't worthwhile, even if your AVERAGE current account balance is £12k.

Many people go for offset on the basis of convenience - which is fair enough. But for only very few people is it going to be the cheapest option.

DiggingOut

MarkyMarkD wrote:

It depends if you need that £30k.

Presumably he needs some of it for the taxes, since he only pays them every six months. So even if his normal savings are available for mortgage reduction, he'll have an average savings balance equivalent to three months worth of taxes.

EdInvestor

In general I am told that offset is economic if you have approx 50% of the value of the mortgage in savings, which sounds like it will suit several of the posters here.