Offset Mortgages -- the Numbers

jamesd

loveprada, it's a trend and I think the FSA is already investigating. You can complain after changing and some people have had success in getting a partial or full refund of the difference. It's one method lenders are using to try to discourage people from changing mortgages, and to make a bit more money on a fee that is often overlooked.

Supernova

OK more on the numbers.

If you are fully offset and use the saved interest to reinvest elsewhere does it make sense to have a higher interest rate and lower fees?

TIA

jamesd

If you're committed to being fully offset then higher interest rate and no fees makes sense. Since the house is fully offset the interest saved sounds like an excellent amount for investing in equities via an ISA or pension.

Being fully offset may not make sense if you have better investments available paying after tax more than the mortgage interest rate that is available. But for you as a higher rate tax payer that means more than 8% to beat a 4.8% mortgage and that's harder to do than it is for basic rate tax payers. A lower mortgage interest rate could make sense if it let you make money on savings or investments at a rate high enough to cover the fees you'd pay to get it.

Supernova

jamesd wrote:

If you're committed to being fully offset then higher interest rate and no fees makes sense. Since the house is fully offset the interest saved sounds like an excellent amount for investing in equities via an ISA or pension.

OK thanks James.

Right, so the question is whether 6 years is enough time to make the £26,550 I flog the endowment for and put in the offset work as hard as possible to get near the £56,750 outstanding. From what I understand 5 years is the minimum to consider for stocks growth, so, still a risk on paying back the mortgage?

Obviously, I'd invest the £101.90 endowment premiums as well.

jamesd

Definitely a risk in stocks because your mortgage could become due at a time when the stock market just fell and hasn't had time to recover. So long as you can remortgage this doesn't matter much: you just take out a new mortgage and wait for an apparent market high or at least for recovery. That is: not so much risk if you aren't forced to take the money out at a specific time.

Some other options:

1. Cash ISA. If you could put all 26550 in one at 5.75% you'd get 40% increase in 6 years, leaving you with 37132. The 3000 per person per year limit stops this.

2. Zopa looks able to deliver 11-12% after bad debt before tax, though it can take a while to lend out the money. Limit is 25000 without a consumer credit license and you have to use the higher risk borrowers (who are still pretty good risk) and longer 3-5 year terms to get those returns. 12% before tax is 7.2% after higher rate tax and gets you 52% growth, 40290 total. Zopa help with the consumer credit license application. One advantage compared to equities: it's not subject to stock market collapse risk. But a sudden rise in unemployment could increase the bad debt rate above projections, reducing returns.

Equities can match or beat Zopa and in an ISA or pension can avoid the tax that reduces the return significantly.

One thing you can't protect against: the stock market could fall in value to 25% of current values over the next three months and would be unlikely to even get you back your current value in 6 years. Such is the risk of shares.

What you could do: all of them at the same time. Cash ISA limit each year for some safety. Equity ISA limit for share exposure (with lots of higher risk funds like developing countries initially, gradually switching to a higher proportion of safer ones starting in say 3-4 years). Zopa lending for the longest terms to the highest risk (highest return) borrowers for the rest.

And perhaps exploit that pension opportunity to get some extra pension value if you have the money for it and don't mind potentially taking a bit longer to pay off the mortgage to get a good deal on the pension. You're definitely in the time when you should be making sure that your pension plans are in shape and a few more years on the mortgage is worthwhile to get ahead on the pension front, I think.

Supernova

Thanks for the ideas James. Much appreciated.

loveprada

James D

Thanks for your advice - will give it a try!

lifeis4living

hi i new to open plan but i have an open plan for £20,000 and i have £20,000 in savings ,should i pay of mortgage or just keep paying the mortage and when i finish in 8 years time i have still my £20,000 any advice pleaz

greensea27

I have a mortgage with the Newcastle Building Society and an offset savings account with them too. The Newcastle limit the amount you can offset to 85% (they don't pay interest (or technically offset interest) above 85%), but I have managed to get all 85% (about £50k) stoozed (i.e. borrowed on 0% interest credit cards - see http://www.stoozing.com/index.htm for more details). This means that instead of paying c£240 per month in mortgage interest, I am currently paying c£38 pm, the savings going towards my mortgage total. As a higher rate taxpayer, this equates to a tax-free interest rate of about 8.33%, so stoozing, and offsetting, is very much a no brainer for me.

green-sea

newgirl_3

Hi there, this is my first post so apologies if this has already been answered before.

Have waded through some of the advice but am still confused so any help would be much appreciated. Am just about to change my mortgage - £106k with 11 years to pay. Currently paying £1100 per month on a fixed rate repayment, but want to reduce this to £700 per month. Have £65k in savings and about 4.5k goes through our current account each month. We save about £600 of this a month towards holidays etc. Would really like to drastically reduce the number of years we have to pay and so are looking at current account mortgage such as One Account. Would this be a good bet for our situation? Thanks !