Offset Mortgages -- the Numbers

MarkyMarkD

jamesd wrote:

It's unlikely that anyone here will use normal mortage to mean SVR. It'll always mean the comparable non-offset product or some other reasonably competitively priced deal.

If you happen to have 15,000 in cash ISAs Ruffler Bank offers a still higher rate: 5.93%.

Thanks, jamesd.

Of course I didn't mean SVR when I said "normal mortgage". SVR is what daft people pay.

When I say "normal mortgage" I mean the equivalent, non-offset, discounted fixed or tracker product. And I don't mean equivalent with the same lender, either. I mean the best buy equivalent.

As James has suggested, even with the same lender you can normally save 0.25% by going non-offset. If you are prepared to choose a best buy non-offset lender, you will almost always save more than that.

MarkyMarkD

charl62 wrote:

Hi, first time visiting this very informative thread, but I'm afraid all these facts and figures are beyond my understanding. We have a fixed rate finishing on 31 March with Lloyds TSB. I have already approached them and their fixed rates are 5.79% to continue mtg of £146000 over 15 yrs. I have looked at taking out another fixed rate, but they all seem to be around this rate if you want a min of 5 yr fix. We bank with First Direct and they've offered us a 5.49% offset mtg fixed for 10 years and we have approx £3000 going through currect a/c each month and a small savings a/c that we could also offset. We have been with First Direct for 10 years. Your thoughts would be so helpful as I'm starting to loose sleep over this. Many thanks.

5.49% is a good 10 year fixed rate, so if you are getting offset benefits thrown in as well that is not bad. Accord Mortgages are doing 10 year fixed for 5.29% according to the FSA's comparative tables, but whether that works out better or worse value once fees are included is a different matter.

I wouldn't lose sleep over choosing the FD deal given the rates you are quoting. But I would find out what the early repayment charges are, as I can't see them disclosed on the FD website.

jamesd

charl62, 3000 going into and out of the account each month is not enough to be of value.

Compared to the 5.29% mortgage mentioned by MarkyMarkD, you would need to save 0.2% of your mortgage payments each year. 0.2% of 146000 is 292. To save 292 you would need to offset with at least 5318 average offset balance if you ignore interest the money could be earning in a savings account.

With savings accounts paying 5.5% today before tax and assuming that you're a higher rate tax payer, that's 3.3% after tax rate. That reduces the gain from offsetting from 5.49% to 5.49% - 3.3% = 2.19%. 292 / 0.0219 = 13000 in the offset account before you start saving money compared to the 5.29% rate.

For a basic rate tax payer the calculation is 5.49 - 4.4 = 1.09% gain. 292 / 0.0109 = 26800 in the offset account to be better off.

If cash ISA allowance is unused you lose money because cash ISA rates after tax you don't have to pay are higher than the mortgage rate so every pound in the offset account costs you money.

If the fees are higher they reduce the annual 292 a year benefit of the lower interest rate mortgage, by approximately fees difference / 10. It's actually a bit more than that but it's close enough.

charl62

Thank you for setting out the figures for us. We were thinking about paying £80,000 of the monthly repayment as interest only and £66,000 as capital and interest which obviously increases the repayment each month, but at least you are paying some of the capital off. Otherwise FD have said that if we take the interest only option, we can overpay say £200 each month which will go to paying off the capital. Also there is no early redemption charge if we keep the account open with say £1.00 and ask them not to close it before 10 years is up. I agree that the figures for the 5.29 mortgage does look better but the offset is flexible and with four children growing up it would be quite nice to have that flexibility so long as we try and overpay at least 9 months out of 12, as at the moment we pay a certain amount each month and there's no reducing that payment for example around christmas and this causes hardship. My husband retires in 2012 and will receive a lump sum of approx £60,000 and every two years we receive a payment from a savings scheme he's got through his work of approx £2000 which we would hope to use to reduce that capital figure. Are the figures looking more in our favour now or not as I'm not sure and will leave it up to you who are good with figures?? Your advice would still be greatly appreciated.

gibbo888

Is there a company or all of them!
Which allows you to offset the full mortgage balance?
Am i right in saying if i offset the full amount, then i will have to pay nothing per month for the mortgage? ( i know i loose interest on the money)?

Thanks

Mike

MarkyMarkD

Quite a few (most) lenders will let you offset the entire amount; a few have a minimum proportion.

jamesd

charl62, that has no effect.

You might consider using interest only for it all to get you additional flexibility, then routinely overpaying by the difference between the repayment and interest only payments.

Personally, I'd look for a lower interest rate on a mortgage of that size. The need to repay by age 65 ona First Direct mortgage may also be a concern.

Bernie

gibbo888 wrote:

Is there a company or all of them!
Which allows you to offset the full mortgage balance?
Am i right in saying if i offset the full amount, then i will have to pay nothing per month for the mortgage? ( i know i loose interest on the money)?

I can confirm that Intelligent Finance permit you to fully offset your mortgage advance.

My wife and I have done this to avoid having to cash in our ISAs and pay over all our savings to buy a house outright. For a £400 arrangement fee, our mortgage has effectively become a 10 year interest free loan.

It means that we are oblivious to interest rate changes, our original large cash lump sum remains immediately available for us if we need it and most important for us, our painstakingly accumulated ISA investments remain intact until such time as we can redeem them.

Each year, we move £3000 from the offset deposit account into each offset ISA - nothing changes except the amount of cash put behind the tax-free wrappers of the ISAs.

Currently we are paying down the mortgage advance each month and as each ISA becomes "surplus" to the offset, we are transferring them to better homes. The wife's ISA is currently in transit to the Ruffler Bank.

However, you won't get away with paying nothing! IF calculate your monthly repayment as if there was to be no offset at all and that's what you have to pay to redeem the mortgage advance. The deal is that if you fully offset the advance, you pay no interest. So far, we have paid - wait for it - £2.84 in interest on our mortgage.

:beer:

sad_gills_fan

Oh how I wished I'd paid more attention in maths at school now! My brain is hurting reading all of these threads .. I thought I understood offset mortgages but after reading this, I'm even more confused than before! Please could someone help me .....

In/Out of current acc: £2300 pm (always have £400 approx left)
Current fixed mortgage: £85k over 18 yrs (£600 pm fixed until Oct to C&G)
Have £2000 payout every year from employee share scheme.

1. In 3 years time, my partner and I will be going to Oz with a view to moving out there. If we decide to do that, we need to sell the house and pay off the mortgage .. don't particularly want to pay fees for this if poss. Would need £3.5k for visa fees (can I 'steal' that from an offset?)

2. If we don't emigrate, we would like to pay extra each month to bring our term down.

3. We like holidays so we save £200 pm for those.

Basically, I'd like to keep our monthly payments roughly the same and I definitely need fixed rate as I like to know how much is going out each month.
I've looked at One Account, Abbey and IF and have now realised that I don't have a clue where to start!! I have bank accounts with HSBC and Nationwide so would this give me any sway with the arrangement fees?

Sorry for burbling, this has got me all confused now! Thanks for any advice anyone can give.

Sad Gills Fan

MarkyMarkD

There's nothing in what you say to suggest offset. A flexible mortgage with drawdown facility (and a lower rate) would seem a lot more suitable IMHO. You are going to have to be very careful with choosing fixed rates, given your desire to possibly redeem in 3 years' time. If you are definite that you won't sell within 3 years, but may do within 4, it may make a lot more sense to fix for 3 years than for 2, and then to stay on a variable rate (with no penalties) whilst in Oz and deciding whether to sell or not.