Offset Mortgages -- the Numbers

jamesd

Nubs, NS&I ISA pays 5.2 or 5.3% for new deposits. Ruffler Bank pays 5.75 and accepts transfers in if you phone them and ask for the form. They are a small bank, with the usual depositor funds guarantee, but size may put some off. Since you get tax benefits for as long as you keep the money in the ISA it's typically a bad idea to take money out. Better just to transfer to the best available rate. Always ask for a transfer form from the receiving bank, you can't just withdraw and redeposit yourself.

If you will not use ISA money to pay off the mortgage (I don't suggest using it for that - its tax benefits outlast the mortgage) there's merit in both of you putting the maximum amount possible into the ISA to get those tax benefits.

Alternatively, there's the 12% regular saver from Alliance and Leicester that accepts up to 250 a month maximum from each of you, must be the same amount every month. That rate is good enough that it pays to borrow the money to use it...

Next interesting one is 8% at variable up to 250 a month for two years from Lloyds TSB. That's good for you as a non-payer of tax. Less good for a basic or higher rate tax payer because then it's less than your mortgage.

Here you have the two regular savers that are so good that you can make a profit by borrowing the money to put into them. Better to use those if you don't want to use the ISA option.

What I would do if you haven't used the ISA allowance this year is:

1. Both of you put 3,000 into the Ruffler Bank ISA and transfer the existing ISA. That leaves 14,000 of savings to deal with.
2. Each of you sign up for the A&L 12% accounts at 250 a month, committing you to need 6000 in 12 months. That leaves 8000 of savings to deal with. The 6000 is free again a year from now. For you, file the I'm not a tax payer form.
3. You as a non-payer of tax sign up for the Lloyds TSB regular saver, make 500 initial deposit and maximum 250 a month for two years. That needs 3500 in year one, leaving 4500 of savings to deal with. At the start of year two the 6000 from A&L is free so that makes it 6000+4500 or 10500 to use. 3000 of that goes into this Lloyds account during the second year, leaving you with 7500 to use.
4. At the start of the second year you put 6000 of that 7500 into a cash ISA for each of you leaving you with 1500 of savings to use.

While the money isn't actually in the regular savers you can hold it in the offset account.

If you don't expect to be a tax payer again, it's arguable whether you should use the ISA, since you may not benefit from the tax break on the interest. But it's good to accumulate it as part of retirement planning, perhaps. It would leave you less well off in the short term since the new mortgage rate is higher than the best ISA rate I know of. However, your partner is a tax payer so it's probably best for him to put 3000 of his money in your name in your ISA, assuming you don't plan to get rid of him and keep the money.

There are some other high rate regular saver accounts that you could usefully use, they have penalties for taking the money out or other issues. Those don't matter if you're sure you won't need to take the money out, so you might as well get the extra interest by using them as well, in your name and telling them you aren't a tax payer.

I'm assuming here that you want safe savings, not investments that are more risky but could make more money. Or not.

marka_4

Hi everyone - First post so be gentle with me!! I'm thinking of going for an offset mortgage and a friend recommended the one account. My circs are £85K mtg about £18K savings. About £2K a month goes into the current account and my wife is self employed so money can build through out the year to pay tax bills. I'm currently putting £50.00 a month into a S&S ISA. Current mtg is with A & L fixed at 4.24% coming to an end next year so I'm starting to have a look around ready for re-mtging. Is the one account a good option? I put our details into the mtg shrinker on their website and it said I would pay my mtg off in 9 years!! Surely too good to be true? Any advice/comments would be welcomed. Cheers.

jamesd

marka, the One Account current account mortgage is one of the most expensive prime rate mortgages around. Check out the offset accounts available from a wide range of other lenders and you can save 0.75% to 1% interest and pay the mortgage off more quickly than whatever the One Account calculator says you can do with that account.

The One Account is superior in mortgage payoff time to an offset account from other lenders only when you have lots of money going in and coming out each month - perhaps 30% of your mortgage amount or more.

marka_4

Thanks Jamesd. I appreciate the reply. DO you have any thoughts on a good off-set mtg, can you recommend one?

Joe_Bloggs

@Jamesd
What is their definition of 'pay off time' ? Is it when offset saving equals outstanding mortgage ?
J_B.

jamesd

marka, I suggest that you use the moneyfacts search. You can select current account and offset as a feature on the second page. I don't recommend it for you specifically but one nice looking one is from Yourkshire Building Society, which lets you have three offset accounts and pay standing orders, direct debits and withdraw cash via an ATM from them. You can use your preferences on the search form to find out what looks best for you.

Once you do have an idea, it's still worth checking with a whole of market mortgage broker because there are some deals that are only available via brokers.

Joe_Bloggs, it looks like offset=outstanding and I'd initially compare another mortgage to the One Account using something like this Bradford & Bingley flexible mortgage calculator, entering all the savings and such as overpayments to see their effect.

silvercar

Supernova wrote:

I've been thinking of selling my p*sspoor endowment and transferring the mortgage to an Abbey flexible for the last 6 years of its life.

Is it acceptable to keep the savings pot at 90-95% of the mortgage for that whole time?

very acceptable, some people have the pot at 100%!

unicell

I know the off-set works for me (with some serious CC smoozing). I manage to keep an average of over £20,000 of CC money in my current account (not paying interest or at 1.9% pa from Lloyds CC - just ring up and ask to close your account) and as a result am unhappy if I pay more than £130 per month interest on the mortage, today £49,180.
Its good to see the capital repayment of £300 each month.
p.s. get some personal finance software I use MS Money and the reports show every category of expenditure.

Supernova

silvercar wrote:

very acceptable, some people have the pot at 100%!

I spoke to the Abbey about that and the said they will only allow up to £4K short of my mortgage, so £52K out of £56K.

I can't find it in the written T&Cs though.

skim

I'm thinking of an offset mortgage for a house my wife & I are buying
amount to borrow £138,000
Savings £65,000
We save over £1000 a month

Looking at some of the mortgage calculators out there most reckon about £800 per month yet the OneAccount seems to just calculate the monthly payment on the difference e.g. £73000 rather than £138000 & therefore OneAccount seems much cheaper at about £460 per month.

Not sure why the difference in the way the different mortgage lenders calculate the monthly repayment?

I guess an offset would suit me much better than a std mortgage - what do you guys think?