Off-setting v overpaying... help!

barryjohnsmith

Hi

For the first time in my life, I'm set to be in the black following the sale of my former property.

After my partner and I pay off our debts and the mortgage on that property, we'll have around £25k left. So I was considering putting 2k into an instant access savings account, 3k into a cash ISA, and using the rest towards reducing the mortgage on our current home.

Now I am tied in to my existing mortgage product with Scottish Widows for another 12 months, and the max they will allow me to pay off is 10% of overall balance (approx £12k) and I believe there will also be a penalty charge if I choose to do this.

The alternative seems to be to offset the funds in a separate savings account. Though no interest is paid on these savings, no interest is charged on that amount of the mortgage itself. Plus, since there's no interest to pay, the taxman can't take it!

As I said, this is the first time I have been in the black in my life, so any advice is much appreciated.

Thanks!

missprint

I was in the same position earlier this year, as I understand it in order to offset the extra savings against the mortgage you need to change to an offset or current account mortgage. The offset mortgage allows separate accounts (savings, current account etc) to be offset against the mortgage so long as they are all with the same lender. The current account mortgage does the same thing except that everything is in the same place (eg the One Account). Some lenders allow ISAs to be offset as well (eg Intelligent Finance and Barclays). As you are tied to your Scottish Widows mortgage for another year you may have to wait till then, doing heaps of research in the meantime. Put your savings in the highest interest savings account till then.

I did a lot of research and there were a number of options. As my old mortgage was with C&G I looked there first to save the closing fee of £225. C&G allows you to offset not only your own savings but you can also include friends and families accounts (so long as they are with Lloyds), but then they will not get interest on those accounts. However, Lloyds did not have a particularly favourable interest rate (0.9% above base) and they did not allow ISAs, so I finally settled on IF at 0.34% above base for the life of the mortgage. They are allowing me to include my partner's income in a joint account as well as both of our ISAs even though it is only my name on the mortgage.

I am sure there are plenty of people more knowledgeable than me who can also help with advice.

Good luck!

barryjohnsmith

Cheers - that's really useful. Scottish Widows do operate an off-setting facility alongside the mortgage product I have got - it's just I've never had a need to set it up. But I get the impression it's just a question of giving them a call. That said, we go from our discounted rate to their standard variable this time next year, so it may be we are looking around for another mortgage co. then in any case.

Tustastic

Barry, well done on going into the black. I too have an offset mortgage but I think they are only really worthwhile for people who have enough funds to offset quite a bit of the mortgage debt. Read the mortgage guides on here to make sure but I think it may be around 25% of the total.
Regarding your savings, is £2K enough for a family in a house? Annual insurance policies etc etc have to be saved up for. If you write out all your income and outgoings you will be able to see how much money you need to put aside for bills every month, then how much other money you might be able to chuck at the mortgage.

missprint

Another thing - it has been pointed out elsewhere in other threads that an offset mortgage is a good choice for people with 42% of the total mortgage amount (or more) in savings. For those with less, a better idea might be a low interest mortgage deal and high interest accounts for the savings. I personally enjoy the experience of actively managing the offset arrangement and have included some stoozed funds. But then I was lucky enough to have more than 42% of the mortgage after the sale of my old house, I preferred to retain the flexibility of having access to the money rather than paying off a larger chunk of mortgage.

Again there are plenty of people with far greater experience who should be replying any minute.

barryjohnsmith

Cheers - that's interesting and I wasn't aware of that. Certainly we won't come anything close to the 42%, so perhaps a high interest savings option would be best afterall. I intend to switch mortgage companies next year in any case, as our current mortgage is 100% LTV - o the interest rate is relatively high. If we can then put the 20k towards the new mortgage, we should be able to secure a more competitive rate and reduce our monthly repayments at the same time.

In terms of the amount I set aside for instant access savings, the 2k figure was really just a starting point - that we intend to add to every month. Hopefully we won't need to dip into it at all, since we should be able to afford our bills and outgoings relatively comfortably once our existing debt and mortgage on the first property is paid settled.

Fruitcake

If you have an Offset facility, you need to maximise the amount, and length of time the money is in the account to make it work best. The more money and longer it's in there the more effect it has.

I do this by paying everything I possibly can by Credit Card, but moving an equivalent amount for each spend into an offset "pot." That way the money is offsetting my mortgage interest for a month, and when the cc bill arrives the money is there to pay it off in full. At this point the money in my account goes down, then I get paid, the current account goes up to increase offset factor, I spend using the cc but the money stays in the account in a different pot, still offsetting. I pay the cc bill and the cycle starts again.

This way the money I would otherwise have spent using cash, cheque, or (some) direct debits is sat in my account working for me. Some companies charge for using direct debit so I now pay these bills by cc; the companies that give a discount for using dd I leave alone.

In addition, this maximises my stooze factor on the credit card, (11 free nights out of 14 for last years holiday, free transatlantic flights for two this year.)

Fruitcake

You Only Listen To Me When I'm Wrong

MarkyMarkD

I think that to express the proportion of your mortgage that you need to have in savings to justify an offset as a simple, "one size fits all" percentage is severely flawed.

If you have a very small mortgage (and anything under £50k is very small in this context) the costs of moving between mortgage lenders becomes increasingly expensive as a proportion of the savings you make. Under £25k, hardly any lender is interested in taking you on as a new borrower.

So, in either of the circumstances noted above, the benefits of offsetting with your existing lender become significant and the savings you make by saving the money in one place and borrowing at a cheaper rate elsewhere become smaller or non-existent.

I would be very surprised if you can remortgage your £25k or less to a lender. sufficiently cheaper to cover the costs of moving it. Probably your best option is to compare whether you could switch to a cheaper product with your existing lender and compare the with/without offset options on that.

Dithering_Dad

I have to agree with the above poster, specifying a minimum offset value before using this facility is IMHO flawed. Once you have invested the max into a cash ISA, there are very few savings vehicles that you can use that (after tax) will provide the same return as an offset, unless you want to tie your money away in a medium to long-term stockmarket investment (and therefore also use the full ISA allowance).

The original argument for requiring a set amount of cash in an offset was because offset mortgages are more expensive than normal repayment. However the costs are reducing all the time so the amount you need to save in an offset to make them worthwhile is also reducing.

Bernie

If you do decide to go for a different provider for an offset mortgage, I would suggest that you consider one that will allow you to offset your ISA as well as other accounts.

This will enable you to slide £6,000 per year of your savings into the tax-free wrapper of the ISA. It makes no difference to your offset arrangements in the here and now - still no interest paid or charged but, when the big day comes and your mortgage is paid down, you could end up with a significant sum moved into these tax-free shelters.

Even in the years that you cannot afford to actually deposit more funds into your savings, you can still have the satisfaction of moving money across from your offset deposit to your offset ISA...

MarkyMarkD

Bernie

I've previously called you the "king of offset" and I probably stand by that - I don't know anyone who uses offset as cleverly as you.

But having thought again about your fundamental principle of moving money into your offset ISAs each year, and your claim that when your mortgage is paid off you will have a significant sum in your tax-free ISA shelter, I think you are wrong.

If you have a £90k mortgage (for example) and offset £3k each = £6k pa in your ISAs, after 10 years you'll have £60k of ISAs and (maybe) £60k of mortgage - the entire amount will have been cleared. But if you close down the arrangement at that point, you'll lose your tax-free ISA pot.

If, instead, you keep on paying the mortgage until its natural end (and I'm sure that this is what you mean) then you'll pay off the mortgage in full, and you'll have (say) £120k in your ISA pot. And, of course, you can then transfer this tax-free ISA money elsewhere.

But if you hadn't bothered with an offset, or the ISAs, you could have paid the mortgage off in full 10 years earlier merely by overpaying (or, indeed, by paying lump sums off each time you remortgage, maybe every 2 years). And then you'd still be able to use future years' ISA allowances for future years' savings.

I can't see that you are genuinely getting a financial benefit from stashing all this ISA money away, instead of using the same money to pay off your mortgage. The only reason your logic would stand up is if you have more than £6k pa spare for ISA investment, meaning that it's really beneficial to carry forward some ISA tax-free money from the period you are paying your mortgage. And if that was the case, you can put £14k between you into a maxi ISA in any case.

Am I missing something obvious? Or have you successfully "sold me a dummy" when I've previously believed you were doing something very clever?