Advice needed on offset vs "normal" mortgage

yulita11

Dear all,
I've been addicted to this site for ages and was reading and taking in all the right things to do. I am kindly asking for an advice on my current situation. I am buying my flat under "Right to Buy" initiative.
Full flat price (valued at) - 104000.
Price after discount - 49920.
Savings - 40000.

I am thinking of going "offset" but high arrangement fees (like 2K in Woolwich) put me off.

Currently my savings are: 30K in ISA on 3%, 10K in National bonds - I know it is not wise and does not pay interest at all but that's how they are.

So the options for me are:
1. Offset mortgage
2. Normal tracker/fixed mortgage with large-ish deposit.
3. Loan of ~10K to buy the flat outright.

Flat needs a lot to be done: new central heating, new kitchen, general refurbishment etc.

I would appreciate if knowledgeable people post their thoughts please. Calculations and number crunching are more then welcome!

ACG

The advice your looking for is not something that can easily be done on a forum, infact im not sure it can be done on a forum at all.

There are other offset mortgages around other than the woolwich. You could do with working out how much interest you would get paid on your savings, how much interest a standard mortgage and an offset mortgage would cost.

Then decide whats important to you - smaller mortgage and less savings or flexibility etc.

Then decide which you want.

If your not sure then it could be worth a chat with a mortgage advisor. We cant give specific advice on these forums more just general guidance and pointers etc.

hopefully thats helped a bit.

holly_hobby

You need to refer to a IFA mge adviser on this (although a forum is great for getting a handle on things), as a mge adviser won't be qualified/permitted to advise on alternative investment mediums to an offset mge arrangement, which may be a better fit for your requirements (after their financial review of you).

However, sticking with an offset mge for the moment, traditional offsets don't pay interest on the capital held, but instead offset the equal amount against your linked mge account/debt (there are a few providers with a variation to the trad method). Of course all accounts to be linked must also be held with the mge provider - which also, with a select no of providers, include ISA(s).

If you are a tax payer an Offset Mge may be particularly advantageous, as you are effectively not incurring a tax liability on returns being offset - whilst retaining access to it.

Whereas if (as a tax payer) you held the capital in a traditional interest/return baring account, any return would be exposed to a tax on interest deduction/liability, and there may also be restricted access to the capital (notice accts etc).

So you can see this type of arrangement can be beneficial, particularly for higher rate tax payers.

Ideally the amt reqd for offset (in your case 30k), should be in a sep linked mge account, other than your normal current account, to effectively ring fence it from you "dipping in" (savings, ISA, etc), however if you are disciplined and know you won't touch it, then it could be held in a linked current account - as any significant reduction in the 30k may alter the accuracy of advice given at this time.

None tax payers - well offset mge may not be the best way to make your money work for you. (ie - those whom may still retain a mge, although their income is under PA). The same goes for individual with only ever a relatively small (compared to mge debt) amount of capital held in the linked account - as the typically higher offset mge rates are higher than a non-offset arrangement, so it would be largely of neglible benefit .

There are several areas that need to be evaluated before the decision is made whether to offset, invest in other mediums, or simply take a 10k mge from outset (using your 30k as additional deposit) - but I would NOT obtain any 10k personal loan, to effectively pch the property without mge, due primarly to higher payrates on PLs when compared to mges, but there are other future aspects to consider with an unencumbered property.

Make an appointment with a local IFA Mge adviser - whom once having evaluated your financial and personal status/requirements, will be able to provide a well thought out investment/mge repayment stratergy for you (with on going support as you need).

Hope this helps

Holly

yulita11

Thank you so much, ACG and Holly. After reading my own original post I had realised (with your help) this is definitely the question for mortgage advisor rather than forum, indeed!

Joe_Bloggs

@yulita
Check your Experian, Equifax, Callcredit , credit reference agency files for mistakes. If you do not have a clean or insufficient credit history then you will have trouble borrowing. It takes time to fix problems so the sooner the better for you.
J_B.

getmore4less

The equations to do the numbers are quite simple

But this is going to be about the bigger picture the net initial borrowing requirement is only £10k.

Think about your objectives

How much cash do you need to do the place up.
How quick do you want to do it.

How long to fund this and the £10k from income

How much spare income do you have to fund debt,replace ISA funds.
How will this change over the next fer years.

What tax rate

Any plans to move

longer term savings goals.

The primary benifits of offsets in most cases are cash flow and liquidity


If you do go down the offset route borrow as much as possible for as long as possible as long as it does not effect the rate too much. Once you pay the fees you may as well have the benifits for as long as possible even if you end up only using htem for a short period.


Any tax benifit on offsetiing is NOT the mortgage rate it is the tax on the savings rates that you benifit from.

Don't fall into the trap of thinking that offsets funds are like savings at the mortgage rate they are not.

yulita11

Thank you very much, getmore4less, the list of questions is spot on. Once I know the answers myself, I will be able to make informed decision.
For now, I am inclined to go down offset route purely for the benefits listed in your post, i.e. cash flow and liquidity. Also, offset mortgage is going to be linked to my current account (I'm thinking of going with Natwest) - at the moment the money in my current account are not earning any interest at all.

getmore4less

yulita11 wrote: »

Thank you very much, getmore4less, the list of questions is spot on. Once I know the answers myself, I will be able to make informed decision.
For now, I am inclined to go down offset route purely for the benefits listed in your post, i.e. cash flow and liquidity. Also, offset mortgage is going to be linked to my current account (I'm thinking of going with Natwest) - at the moment the money in my current account are not earning any interest at all.

Makes a small difference to the overall costs.

the best it can do is the same as an overpayment of one months income, depending on cash flow in the montha and savings per month usualy much less than equivilent to an overpayment of less than 1/2 the income.


If you don't need to keep the ISA's then that will give more options.

yulita11

Again, getmore4less, you are absolutely right re linking current account, it give max of one month income benefit (well, plus the balance).
So far the results are:
1. Woolwich - product fee is 1.5K, disproportionate for my need.
2. Natwest - they don't offer offset mortgage on right to buy.
The hunt for cheap (in terms of fees) offset mortgage is on. Mortgage broker would probably be the best route to go. I feel like doing cheap DYI whereas professional is needed.