Thinking about an Offset Mortgage

princessdon

We are currently at the end of what was a bad (hindsight is a wonderful thing) fixed term deal. We have been paying 5.99% for 7 years and are now on a 3.99 Variable Rate.

We are thinking of moving to an offset mortgage as our savings are approx the same amount as the remaining mortgage.

A few things we have thought of (but this is where we really need the pros and cons)

Over half our savings are ISA's and have taken a long time to build up - given that they are tax free - is there any advantage of taking them out and putting them into an offset?

If we discounted the ISA's we would only have approx £23-£25K in savings is this worth the offset?

We currently overpay by over £300 a month on a voluntary basis plus any bonuses/Overtime is used to repay the morgage but this is at our discretion. Ie we may chose a weekend away, so like the flexibility.


We are only looking at a short term offset as we intend to move in a few years (once the children are older and I can increse my hours). We anticipate a large increase in the new purchase price and mortgage (all being well).

Our current home is approx 25% of the market value

Any advice on pros/cons of offset?

HappyMJ

Why not just use the savings and pay the mortgage debt off completely?

When you move you will still have the equity in the property to use to buy somewhere else.

Pro's - Availability of money at short notice.
Con's - That line of credit costs money.

princessdon

I guess the reason we don't want to pay the debt off is historical.

Neither of our jobs are secure (are any these days?) We have insurance policies that pay our mortage should the worst happen (plus rainy day money). If my OH - the main wage earner was to lose his position we'd not be able to survive in our home for long.

My grannie always said to keep at least 12 months in the bank and to never dip into it - if it's there when you retire that's your reward - guess it's a philosophy I've always used.

I'm always scared of not having that blanket I guess - a born worrier glass half empty kind of chick

McKneff

HappyMJ wrote: »

Why not just use the savings and pay the mortgage debt off completely?

When you move you will still have the equity in the property to use to buy somewhere else.

Pro's - Availability of money at short notice.
Con's - That line of credit costs money.

Excellent advice.....................

surreysaver

Some companies allow you to have an ISA offsetting the mortgage - it may well be worth looking at those. It would be a shame to lose all the accumlated protection you've earned from paying tax on your savings. Or you could try and look for ISA's that pay a higher rate of interest than you are paying on your mortgage so that you do not lose out?

HappyMJ

12 months is a bit much....3 months expenses is more normal to keep on hand in short term investments. You can claim contributions based JSA for 6 months then once that runs out due to capital being below £6,000 if you plan it correctly then you can claim income based means tested benefits including getting the interest paid on the mortgage.

You will not lose your home. If you do not pay your mortgage the interest will capitalize onto the mortgage balance. Your mortgage provider will allow that to happen for quite a long time. At least until your LVR is about 75%. That would take many many years before any posession action is taken....as long as you keep them informed the whole time of course.

princessdon

McKneff wrote: »

Excellent advice.....................

I genuinely can't (my personality won't allow me). I really need that nest egg to sleep at night

I know it's the best financially - but I can't do it in practise.

I thought the offset was a half way house. Ie negating the interest and then paying the capital off - whilst still having that nest egg/fall back if needed.

Would the end result not be the same if I negate most of the interest?

Plus we are both higher rate tax payers - so if we paid the mortgage off any savings would be subject to tax at the higher rate?

mildred1978

We took out an offset mortgage about 3 years ago. In that time we've increased our savings pot from about 10% of the mortgage balance to more than 100% of the value. Each month I move money around to ensure that the mortgage remains fully offset, and money in interest bearing accounts are as tax efficient as possible. We haven't paid a single penny in interest for over a year, and are on target to have the whole thing paid off within 8 years.

That said, having access to the money is important to us. Hence not paying off the mortgage in full.

mildred1978

princessdon wrote: »

Plus we are both higher rate tax payers - so if we paid the mortgage off any savings would be subject to tax at the higher rate?

Definitely go for the offset then. It was the same for us.

(Now we have our own company so our tax liability is teeny tiny :beer:)

HappyMJ

princessdon wrote: »

I genuinely can't (my personality won't allow me). I really need that nest egg to sleep at night

I know it's the best financially - but I can't do it in practise.

I thought the offset was a half way house. Ie negating the interest and then paying the capital off - whilst still having that nest egg/fall back if needed.

Would the end result not be the same if I negate most of the interest?

Plus we are both higher rate tax payers - so if we paid the mortgage off any savings would be subject to tax at the higher rate?

No the end result would be you paying fees and charges for no real reason other than having a line of credit available to you.

You can still save in pensions and ISA's to reduce your tax liability.

mildred1978

HappyMJ wrote: »

No the end result would be you paying fees and charges for no real reason other than having a line of credit available to you.

You can still save in pensions and ISA's to reduce your tax liability.

Pensions aren't ready cash though.