Off-setting v overpaying... help!

Bernie

...that we already had the max deposits in 2x cash ISA and TOISA when we went into this arrangement.

To buy our house, we would have needed to cash in the lot and hand over all our cash savings. We'd have been square but uncomfortable at a time of great change (me finishing with the military after 37 years of a monthly paycheque, similar with the wife leaving the Civil Service).

We now have the house, all our cash deposit is intact (albeit earning no interest) and our ISAs are intact -and will grow, as you've indicated, by another £60K over the next 10 years. We like the idea that all our cash holdings will end up earning interest free of tax.

This was the main reason we looked into offsetting. In our '50's, we have decided we want all our "estate" to be in cash - preferably earning tax-free interest. ISAs are the ideal vehicle for us but the biggest problem with them is the annual throttle on deposits. It took years to get our tax-free savings to where they were, if we had been obliged to cash 'em in, that would have been a lot of lost facility that could never be recovered.

While we are still earning, we deposit enough funds into IF each month to cover the mortgage payment thus as the mortgage debt falls, the surplus in the offset grows. This surplus attracts interest in the ISA in the interim.

...and of course, each year, we simply transfer cash from the deposit account to the ISA. We don't actually have to find or otherwise "save" money, we just move it across!

When the surplus has built up sufficiently to release an ISA from the offset, we move it out to a better provider. One down (her ISA), my ISA/TOISA and her TOISA to go...

Once we've recovered the ISA's from the offset, we will review things, take stock and decide if we will retire or whatever...

...as I said "It works for me Mate!"

:beer:

MarkyMarkD

So, are you saying that the deal only works for you because you already had enough cash to pay off the mortgage at the outset, and hence you have never paid any interest at all on the offset mortgage?

If that is your point, then I agree that what you are doing is optimal. But if you ever had to pay interest on any of the mortgage (at the inherently higher offset rates), I am not convinced.

Bernie

MarkyMarkD wrote: »

So, are you saying that the deal only works for you because you already had enough cash to pay off the mortgage at the outset, and hence you have never paid any interest at all on the offset mortgage?

If that is your point, then I agree that what you are doing is optimal. But if you ever had to pay interest on any of the mortgage (at the inherently higher offset rates), I am not convinced.

Yes, that is correct. Actually got caught for £2.84 interest somewhere probably while some-one dragged out keying-in the figures.

We started with the fact that if we paid the house off from the start, we would not be earning any interest from our cash because, obviously, we would have spent it! Therefore we decided we may as well go for an offset mortgage because earning no interest from that source would be the same outcome! If it had stayed at this, we would have simply felt more secure simply from having instant access to our deposited funds during our joint transition from the military/Civil Service back into "proper, normal" jobs in "civvy street" .

In our discussions with IF re ISAs, they told us we could add to our offset ISA from the other accounts in the normal way and remove the ISAs from the offset at will. As we had other policies and stuff that would mature in a few year later, we learned that this additional cash could go into the pot and allow the ISAs to be released from the offset. Well, when we realised that we could preserve our ISAs throughout the house purchase saga and beyond, the whole thing came a no-brainer for us.

As I stated elsewhere, for a one-off fee, our mortgage has effectively become a large, 10 year interest free loan that has enabled us to retain and add to our ISA over the house-purchase period.

We're both in the final phases of our working lives, debt-free other than this mortgage and still earning a comfortable joint income (though not with the level of security to which we had become accustomed)! While we are earning, we can fund the mortgage payment directly and will, on current progress, have paid down the mortgage sufficiently to recover all our tax-free deposits within a few years.

The offset mortgage has tided us over until other funding sources (ongoing earnings, other policies etc) were able to take over in the offset.

:beer:

MarkyMarkD

OK, thanks very much for the clarification.

In that case, I'll have to revert to my original stance that offset only makes sense financially (ignoring non-tangible benefits like "it's less effort") for people with an absolutely enormous proportion of their mortgage balance in available cash.

Dithering_Dad

Hi Guys,

I'm probably missing something, so please jump in and tell me where I'm going wrong..

..but why would you want to offset a cash ISA??

For example, my offset mortgage rate is 5.3 and my Barclays ISA (to be purchased soon) is at a rate of 6.5. If I offset the ISA, then I will effectively be dropping the ISA rate from 6.5 to 5.3. As both savings vehicles are free of tax I really don't see the sense of this!!??

Confused!

EDIT: And even more confusing, if you use the full ISA entitlement of 7k, which means your investing in the stock market, you stand to lose even more money because long-term the returns from investments always beat savings. So you could be dropping (say) a interest return of 8% on your ISA to 5.3% on your mortgage.

Even more confused!!

MarkyMarkD

Dithering Dad

You are spot on.

This is my main problem with offset. It isn't good value for those who are prepared to actively manage their money, as for the last few years you have always been able to earn higher tax-free ISA interest rates than you can pay on a good value mortgage. And if you are buying a good value mortgage with a fixed fee (rather than the newer %-based mortgage fees) there's no incremental cost in borrowing more. So it's madness to offset.

The only reason offsetting your ISAs makes sense is where you have virtually all the money you need to offset your mortgage - like Bernie - and the residual bit wouldn't worth the faff of getting "good value" mortgages for.

Dithering_Dad

I'm not sure I'd go along fully with the point about it being madness to offset. I'd agree that if an individual has negotiated a low rate mortgage, has not used this year's Cash ISA entitlement and can only afford to overpay by £3k or less per annum, then it makes more sense to use the cash ISA rather than an offset.

I can also see that the above also holds true to a certain extent for the full ISA amount of £7k providing you don't mind the money being invested in the stockmarket and therefore a little less accessible, invested for a longer term and the value may go up or down.

After that I start to struggle because unless you start locking your savings away in long term, well managed stock market investments that will provide returns that after tax will beat your mortgage rate (which in my case would mean a consistent return of over 7.42%), I don't see a better investment vehicle than an offset.

In fact, I tried doing this once, where I was told that a certain long term investment would not only cover the repayment of my mortgage but provide valuable life assurance cover and some cash left over to treat myself. This was called an endowment and I think we all know what happened there.

For me, I like the assurance that when I make a payment into my offset or cash ISA, I am putting away a chunk of money I can easily access, that I don't have to declare on my tax return and in the case of the offset, reduces the interest on my mortgage so that my normal monthly repayment pays off a larger chunk of the capital debt.

As far as the original title of the thread "Offsetting v Overpaying", I'd offset everytime because, as I've just explained above, offsetting your interest charges frees up cash to make larger repayments, yet stil allows you easy access to your cash. Best of both worlds.

MarkyMarkD

Not sure I follow you, DD.

Overpaying on any decent flexible mortgage gives exactly the same access to your cash.

That's why I say "no" to offset - but "yes" to flexible mortgage products.

I'm not saying "no" to offset" but "yes" to inflexible mortgage products, for the reasons that you state.

Dithering_Dad

Mortgages are getting a lot more flexible, I remember on another thread that on of the posters had a Northern Rock mortgage that she could over pay on and apply for the money back if required, no questions asked.

For my purposes though, I don't want to have to "apply for or request" my money back, I was to logon and simply transfer it back to my current account. If you can do this and can get a better interest rate than an offset account, then that's perfect.

MarkyMarkD

I agree with you. I have a flexible mortgage which allows overpayments and drawdowns without limit, but it doesn't allow me to simply transfer the money online - I haven't done a drawdown, but I wouldn't be surprised if it would take a week or so to get the cash to me.

I might enquire actually - my current account is with the same bank, so it's possible that they might be able to do it over the phone on the same day. It would be interesting to know.