Offset Mortgages -- the Numbers

silvercar

We were talking about having 100% of your mortgage in the pot.

Supernova wrote:

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.

My terms allow me to have any amount in the pot, they will only credit upto the outstanding mortgage amount in their calculations.

How can Abbey stop you putting money in the pot?

jamesd

skim, if the mortgage calculator doesn't support offset funds, reduce the loan amount by the initial offset amount. Then include overpayments of whatever your extra anticipated monthly savings will be.

One of the selling points for the One Account is the limitations is how other calculators don't support offset calculation but this is just a limitation of the calculators, not a real advantage of the One Account. The key advantage of the One Account comes if you have a high percentage of the mortgage amount going into and coming out of the account each month, as happens with some small businesses.

Offset accounts vary in how they affect the mortgage. Some assume you don't want to change the mortgage payments, which seems most common, others offer you the choice. You can generally effectively get the choice by opting for an interest only mortgage and/or by choosing a longer initial term to lower the payment amount. Then you just overpay by whatever you like.

Supernova

silvercar wrote:

We were talking about having 100% of your mortgage in the pot.
My terms allow me to have any amount in the pot, they will only credit upto the outstanding mortgage amount in their calculations.
How can Abbey stop you putting money in the pot?

Well, I looked for it in the T&Cs and couldn't see that either, but that's what they told me on the phone.

Supernova

OK so whilst we're talking about numbers, which I'm not very good at...can someone clarify.

This applies to the Abbey flexible (interest only) where the repayments are not reduced by the savings pot but the saved interest is reinvested in the savings = compound interest.

Is there a point where it is less effective to have the savings pot full because you would have to transfer the saved interest to an account paying a lesser tax free rate, if you didn't want to risk it on a shares ISA for instance?

jamesd

The amount of interest that can be in a cash ISA account isn't limited, only the amount that can be originally deposited each year. So the limit is 3000 per person in "overpayments" if only a cash ISA is being used. Then you get compound interest for the life of the ISA.

Once the 3000 each is used the next step is equity ISA, or other investments that may pay more than the mortgage rate even after tax is deducted. For the longer terms, an equity ISA is likely to do better than cash ISA for the whole sum.

Choosing to wait a few years after the first point when the pot is large enough to pay off the mortgage can result in a substantial leftover savings or investment pot to continue growing. Extending full payback from ten to fifteen years could leave a remaining pot larger than the total mortgage amount, depending on the return on the investments. Seeing this effect may persuade many that they are best served by letting the mortgage run to term and the investments continue to grow.

Those who will be 50 in one to three years or those who will reach retirement may have better options using pensions. Those don't pay off the mortgage as fully but provide a way to get "free" pension money by expoiting the ability to take a cash sum from a pension. Higher rate tax payers can see greater benefits from this.

Supernova

jamesd wrote:

Those who will be 50 in one to three years or those who will reach retirement may have better options using pensions. Those don't pay off the mortgage as fully but provide a way to get "free" pension money by expoiting the ability to take a cash sum from a pension. Higher rate tax payers can see greater benefits from this.

Hmm, so being 47 and an HRT I'm interested in what you say there - can you possibly clarify as I'm not sure what the strategy is here?

Thanks

loveprada

I have had an offset mortgage for 6 years and have noticed that the costs in the 'Tariff of Charges' are just going up and up. When I started the offset mortgage the cost of the final charge was £95 - now it has reached £275. I would have thought that this cost is fixed along with the upfront fees but obviously I'm wrong. Do you know if there is any point in making a fuss or complaining to the FSA and trying to get a reduction of this fee?

jamesd

Supernova, you exploit the opportunity to pay up to your full annual salary each year and get tax relief on it all, then you become 50 and can immediately take 25% of the fund as a cash sum. Because this gets you higher rate tax relief it can beat an ISA, so long as you're content to have the remaining money in a pension.

Best to ask over on the pensions board for more details if you think it may be of use to you.

Supernova

Ah, OK, thanks jamesd. Worth a thought. That's taking a risk on the underlying pension investment portfolio growing by more than 5% a year though, whereas the cash ISA is pretty much guaranteed as long as interest rates don't fall?

jamesd

Supernova, yes, there is equity risk. You know the usual story on that: expected to beat cash over the long term. If you really wanted to you could use low risk investments for the pension pot, or use the usual asset allocation approach to get a blend that suits your taste for risk.