Offsetting?

frivolous_fay

Hello,

We're (still) planning to find our first house this year and are thinking ahead about money and mortgages. Our savings will be approximately £20k once we've (hopefully) both contributed to our ISAs in April. We anticipate needing to borrow around the £170k mark.

I've read a little about offset mortgages which sound interesting; I wonder if anyone could set me straight on a couple of things...

- Do many mortgage providers allow them?
- Would we need to transfer the money from our A&L ISAs to one provided with the mortgage company?
- The only experience I have of offsetting is the One account mortgage (formerly Virgin) held by my O/H's parents. I get the idea it's possible to retain your existing accounts whilst gaining some ground on repayments
- Are there any possible pitfalls or reasons I should *not* consider this route?

Sorry to sound thick but I'm a bit hazy about the whole idea really... if anyone could point me to a resource where I could read up on it all it would be very much appreciated. Any replies gratefully received

cazmanian_minx

frivolous_fay wrote:

Hello,

We're (still) planning to find our first house this year and are thinking ahead about money and mortgages. Our savings will be approximately £20k once we've (hopefully) both contributed to our ISAs in April. We anticipate needing to borrow around the £170k mark.

I've read a little about offset mortgages which sound interesting; I wonder if anyone could set me straight on a couple of things...

- Do many mortgage providers allow them?

They're getting easier to find. Most of the major lenders now have an offset option, though the interest rates are often higher than other types of mortgage.

- Would we need to transfer the money from our A&L ISAs to one provided with the mortgage company?

Only if you're taking out a mortgage with a lender that allows you to offset ISAs, many don't, you'd need to put the money into the savings account they provide for the offset. I'm with Intelligent Finance and they do.

- The only experience I have of offsetting is the One account mortgage (formerly Virgin) held by my O/H's parents. I get the idea it's possible to retain your existing accounts whilst gaining some ground on repayments

Again, it depends on the lender. With the One account it's all one big melting pot - essentially you'd have a £150,000 overdraft with the overdraft limit reducing a little each month. Other lenders seperate it out, for example, in my IF plan, I have separate accounts for my mortgage, my ISA, my savings (you can havae as many savings 'pots' as you like) and my current account. Interest on the mortgage is calculated on a daily basis, but each day they add up the money I've got in the current, ISA & savings account, minus it off the outstanding mortgage amount and then only charge interest on what's left.

- Are there any possible pitfalls or reasons I should *not* consider this route?

The main one is that you take out this type of mortgage and then don't put anything in the offset - a bad move because rates are generally a little higher. However, since you've already got £20k saved up, I wouldn't think this would apply. The One account is much trickier to manage, you've got to be very disciplined.

Sorry to sound thick but I'm a bit hazy about the whole idea really... if anyone could point me to a resource where I could read up on it all it would be very much appreciated. Any replies gratefully received

I'd say have a look at some of the online calculators - Egg have a good one on their site (https://www.egg.com) and IF also has one that takes into account your current account balance as well (https://www.if.com). Have a fiddle with the numbers and see if it's going to work for you.

Caz

frivolous_fay

Thank you - that's increased my knowledge several-fold!

One other thing I'm unclear on - the advantage of offsetting, aside from the benefits of not having to muck around moving accounts - if you're retaining the ISAs, what's the big benefit to you? Obviously you can add to them each year as normal - but the money 'belongs' to the mortgage provider.

At the end of the mortgage, do you kiss goodbye to the figures in your various savings pots, or are you expected to have saved enough elsewhere to pay off that amount, and reclaim your ISA? (complete with several years' worth of tax free allowances)

cazmanian_minx

frivolous_fay wrote:

Thank you - that's increased my knowledge several-fold!

One other thing I'm unclear on - the advantage of offsetting, aside from the benefits of not having to muck around moving accounts - if you're retaining the ISAs, what's the big benefit to you? Obviously you can add to them each year as normal - but the money 'belongs' to the mortgage provider.

At the end of the mortgage, do you kiss goodbye to the figures in your various savings pots, or are you expected to have saved enough elsewhere to pay off that amount, and reclaim your ISA? (complete with several years' worth of tax free allowances)

The idea of offsetting is to pay your mortgage off quicker than the term you've taken it out for whilst still having access to your savings if an emergency arises.

Say, for example, you have a £100,000 mortgage, interest only, over 25 years at 5.79%. Your monthly repayment would be £482.50 and at the end of 25 years you'd still have to find £100,000 to pay off the original loan.

If you offset £20,000 savings against that mortgage from day 1, keep paying the £482.50 and don't add any more to your savings, you'll save about £64,000 in interest and will only have to find about £40,000 to pay off the loan at the end of the mortgage, £20,000 of which can come from the offset account if you want it to. By adding to savings or making overpayments, you first reduce the amount that will be outstanding at the end of the loan and then reduce the length of time the loan will be outstanding for.

If you take a repayment mortgage and offset against it, it's even better. Take the figures above on repayment - your monthly payment would be £631.53 to pay it off over 25 years without offsetting. With £20k offset, the payment stays the same, but you pay it off 8 years and 1 month earlier, save £51,148.41 in interest and still have your £20k at the end of it.

The money that's offset doesn't belong to the mortgage provider, it's still yours and you can offset anything from £0 to the whole amount of your outstanding mortgage. I'm self employed, so I stick 25% of my income into my offset and then take it out again twice a year to pay my tax bill - but in the meantime, it's helping me pay off my mortgage that little bit quicker.

Clear as mud??!?

Caz

frivolous_fay

I suppose at the back of my mind is the desire to hang on to our ISAs and keep accumulating annual contributions (5 and 2 years' tax allowance in each) - but the trouble is, the cash in them represents our deposit

Am I going to be able to hang on to them, or do I need to get over this mental block about empyting the ISAs and losing our hard-saved tax-free allowance? :rotfl:

cazmanian_minx

frivolous_fay wrote:

I suppose at the back of my mind is the desire to hang on to our ISAs and keep accumulating annual contributions (5 and 2 years' tax allowance in each) - but the trouble is, the cash in them represents our deposit

Am I going to be able to hang on to them, or do I need to get over this mental block about empyting the ISAs and losing our hard-saved tax-free allowance? :rotfl:

If you can find a lender who'll give you a 100% mortgage on an off-set deal, allows you to offset ISAs and will let you transfer previous ISAs to them, then you can keep them - but I'd recommend talking to a mortgage broker like London and Country to work out what the absolute best way of doing it is!

Caz