Offset vs. Savings

AlanC_3

Hi,

I changed to an Offset with YBS last year, and now have enough in savings to completely offset the mortgage, which I have done.
I am now in the postion that I pay no interest and if I want access to money I can effectively 'borrow' from myself at the mortgage rate (BOE +0.75%). My question to any experts is this: Is this the best way to use my savings or would I be better to invest the savings( and pay tax on the income) and pay the mortgage interest? I am a higher rate tax payer.
Your ideas would be appreciated.

Regards
Alan C

hermanmunster_3

HI

am in a similar situation - as a higher rate tax payer I would struggle to get enough interest anywhere (partic after the tax is paid) to make it equal the interest I am offsetting. I'm not too good at the figures but with approx 5.5% rate you would need to be getting about 8.25% interest gross to break even.

Bernie

My wife and needed to buy a property when I retired from the military.

The house we decided to buy would have cleaned us out financially if we bought outright including needing us to cash in our painstakingly built up ISAs. We did not want to do this or to be left with no reserve funds to hand.

Instead, we took out an offset mortgage with IF and banked all our ISAs and cash with them to completely offset the mortgage. Mortgage Interest to date: £2.84 (of course we earn no interest on the offset accounts either).

So, our ISA deposits have been preserved (and added to each year). As we pay down the mortgage over the upcoming years we intend to "spring" our ISA as they are gradually freed from the offset. So far, we've removed the wife's main ISA from the offset, transferring it to Ruffler. Now we are opening a new ISA with IF to replace that one in order to be able to continue to transfer offset savings from the deposit account to the new offset ISA.

So, we have bought the house, still have access to our money should the need arise (that we've really effectively "spent" on buying the house) and have preserved the tax-free status of our ISAs.

We definitely feel we have had our cake and eaten it through offsetting.

:beer:

firesidemaid

just out of interest, are you both keeping up the original monthly payments, thereby paying the capital off quicker -or do you feel you don't need to as there is no interest to be saved (just gained potentially)?

Bernie

...is fixed - IF assume you will have no offset and determine the premiums necessary to redeem the mortgage in the time allowed. We actually overpay a bit more too simply to round off the figures to keep things simple.

So in effect, we are overpaying twice - once because there is no interest being accrued and secondly because we find it simpler to see the mortgage come down in set steps so choose to overpay a bit more to round off the figures.

We do deposit sufficient funds into IF each month to meet the mortgage premium thus each month we add to an increasing surplus of funds. Once this covers the next ISA in the offset, out it comes to a better paying ISA provider.

In the meantime, IF pays interest into one of our ISA rather than into one of the other non-tax-free offset accounts.

Definitely a win-win situation for us.

:beer:

hermanmunster_3

sazzacat wrote: »

just out of interest, are you both keeping up the original monthly payments, thereby paying the capital off quicker -or do you feel you don't need to as there is no interest to be saved (just gained potentially)?

Hi - still paying the original amount in so the principal is decreasing - sort of a way of saving. Some of the money in the offset has to make its way to the Inland Revenue every six months or so, so I can't really assume all the money is mine yet....

MarkyMarkD

Bernie is definitely the king of offset, so if you are in his position I would listen to his advice. If you are a higher rate taxpayer then unless you haven't used your ISA allowances, you are incredibly unlikely to earn more money elsewhere without risk.

Bernie - you don't pay mortgage "premiums"; you pay insurance "premiums" and make mortgage "payments".

Bernie

MarkyMarkD wrote: »

Bernie is definitely the king of offset, so if you are in his position I would listen to his advice. If you are a higher rate taxpayer then unless you haven't used your ISA allowances, you are incredibly unlikely to earn more money elsewhere without risk.

Bernie - you don't pay mortgage "premiums"; you pay insurance "premiums" and make mortgage "payments".

High praise indeed! I feel myself coming over all modest.

MSE has been a fantastic resource to us - hearing the straight-forward advice and direct, real experience of others has been a great influence on our decisions and was what led us to offsetting as a solution to our situation. We never believed it would come off in the way it has - Mrs B took a lot of persuading that it would work as advertised. We still have to pinch ourselves.

So, banging on about the benefits that offsetting has bought us is my way of putting something back into the MSE community... it worked for me mate!

Thanks for the wee pointers on terminology - I am, by trade, an aircraft engineer bumbling round in the financial world on what is only our second ever mortgage. These are, in the end, just bills to me...

...if you happen to have the odd Panavia Tornado or RR RB199 engine you need advice on, I can put you square there :rotfl:

:beer: