Santander 123 current account & mortgage

surreysaver

Can I please run this past those of you with more experience in case I have missed something?

The figures quoted here are rounded, but are near enough to allow for me to make an informed decision.

I have a Santander current account, which I have applied to upgrade to their 123 account. I also have a Santander mortgage, being paid off via direct debit from the current account. The mortgage is an offset one, linked to the BofE base rate +.75%, so I am currently paying 1.25% interest on the mortgage. I have c£32k credit available on the mortgage (from an original loan of £125k), plus c£10k in the linked offset account. Monthly payments are c£525.00.

Now, when they upgrade (assuming they don't c0ck it up) to the 123 account, I will earn 3% on my balance up to £20k. I will also earn 1% cashback on my mortgage payments. So, if I move my £10k to the current account, that will earn me c£20.00 pm net interest. My mortgage payments will earn me c£5.25 pm in cashback. The £10k is currently saving c£10.00 pm in interest, so will in effect double my money.

My thought is this: rather than move my savings, keep them where they are, saving me 1.25% on my interest. Instead, take £20,000 from my available credit and put that into the current account. That will earn me instead c£40.00 pm. As my mortgage balance will have increased, my mortgage payments will therefore increase, and so earning me more cashback as well. Although my payments will have increased, I am not costing myself any extra money, as I am earning 2.4% net interest on money that is costing me 1.25% to borrow, as well as earning me 1% for the bother of doing so.

Have I missed something? Obviously, when the BofE rate goes up, I would simply move my money back into the mortgage if that would be financially prudent.

grumbler

Are you sure that if you take £20K from the 'available credit', it will be at your mortgage rate?
I have something similar at Barclays ('mortgage reserve'?) and it's definitely higher rate than I pay on my mortgage.

That said, not long time ago Santander offered 3% (2.4% net) for their instant-access eSaver. It's beyond me why you keep £10K in the linked offset account earning you just 1.25%.

Peter999_2

It sounds like you have the same offset mortgage as me with Santander. I too pay .75 above the base rate.

I paid off the mortgage in 2005, but didn't close it as they wanted about £400. When the interest rates shot down I took money out of the mortgage and put it into a bond. It makes about £200 a month and I've been doing it for about 3 years now and not encountered any problems.

As you say, if the interest rates go back up you just put the money back into the mortgage.

surreysaver

Grumbler: the reason is laziness! Although I always make sure my Cash ISA interest rate every year is above my mortgage rate, and fully paid up. The rate I borrow would be the same regardless of whether it is from my savings or available credit.

Peter: sounds like the same product. I have never removed money from my available credit before, always having had enough savings to play with, but this seems temping! Although I think it will only earn me about £1.20 extra cash back a month.

Wyndham

I've done something similar, with a Santander mortgage that is 0.49 above base rate (love that rate!) and offset. When we took it out, the idea was to put all savings into the offset, and we figured we'd never need another financial product until the mortgage was paid off - but at that point interest rates were around 5% and I was getting a better rate in the offset than I could do in a savings account - how times change! Now have money all over the place, and am chasing rates with the best of them!

Just opened a 123 account, and we get cashback for the bills we would pay anyway, including for the mortgage which just makes my head spin!

For your savings rate, the 3% headline rate is actually 2.4% after tax, so £20,000 gives you £480 a year, or £24 a month. There are conditions on the account about monthly funding and having two direct debits (but you said you were planning to pay the mortgage so that's one) so I'm doing a bit of 'juggling' each month, but it doesn't take long and it's worthwhile in my view.

Good luck! Let us know how you get on....

surreysaver

I used to use the offset pot for borrowing 0% off credit cards when the rate was 5 or 6%, but when credit cards started charging 2 or 3% for balance transfers it reduced the temptation, and of course the point disappeared once the BofE base rate plummeted!

I read somewhere that to do more than three transactions a year from the 'available funds' part of the mortgage I would be charged £15 a time, so I might just withdraw the whole amount of my credit in one go, and put what I don't need into the offset pot until ISA's or whatever need topping up.

I always tend to wait until the end of the tax year before topping up ISAs in case I need the money in the mean time, as once you've taken the money out you cannot put it back in, but if I have a massive lump sum from the mortgage I won't have to worry about that.

surreysaver

Maybe I could increase my monthly payments to £1,000 to take full advantage of the cashback too?