Offset Mortgages -- the Numbers

ptee

The formula at the start of this thread looks really good, but very confusing to the untrained brain! Anyone know if this has been put into a spreadsheet that can be downloaded??

Ptee

ptee

I tried putting the formulas into a spreadsheet but Im not sure the figures it came back with are right. My "X" came out at -82.93, does this mean I need 82.93% of my mortgage in savings to benefit??
I simply copied the first post and then substituted my figures in. Have i gone wrong somewhere or am I just not getting it??

HELP!

Copied from my spreadsheet....

"OffsetRate 5.59
NonoffsetRate 5.25
SavingsRate 6
X -82.93

The left side of the formula is the annual percentage interest you will pay with the offset mortgage. The right side of the formula has two terms. The first is the interest you will pay on your non-offset mortgage, the second is the interest you will receive on your savings.


(100-X) * OffsetRate = 100 * NonoffsetRate – X * SavingsRate
(100-X)*5.59 = 100*5.25-X*6
simplifying:
100*OffsetRate – 100 * NonoffestRate= X * OffsetRate – X * SavingRate
100*5.59-100*5.25 = X*5.59-X*6
solving for X:
X = 100 * (OffsetRate-NonoffsetRate) / (OffsetRate – SavingsRate)
100 * (5.59-5.25) / (5.59 – 6)
X=-82.9268292682926
Obviously, the greater the difference between the rate of the offset mortgage and the best mortgage you could get otherwise, the higher the percentage has to be. The more favourable your after tax savings rate, the higher the percentage has to be.

One of the big advantages of an offset mortgage for some people is that they run very large amounts through their current account each month, and this is set off against their mortgage, even if only for just a few days. Since current account rates are significantly lower than savings rates, to reflect this situation the formula has to be more complicated.

Two more terms:
CurAcctRate 0.9
Y 0.28


On to the formula:
(100-X-Y) * OffsetRate = 100 * NonoffsetRate – X * SavingsRate – Y * CurAcctRate

Solving for X:
X = (100 * (OffsetRate-NonOffsetRate) + Y * (CurAcctRate-OffsetRate)) / (OffsetRate – SavingsRate)
-79.72

X is the break-even point for how much savings you need if you have an average current account balance of Y. So you can plug in your own numbers.


Solving for Y:
Y = (100 * (OffsetRate – NonOffsetRate) + X * (SavingsRate – OffsetRate)) / (OffsetRate – CurAcctRate)
0.28

This formula is for when you know how much savings you have (X) and are trying to determine what average balance you need in your current account to benefit from an offset mortgage. Y is the break-even point -- more than Y, and you would benefit from the offset mortgage.

jamesd

ptee, your savings rate is higher than both the offset and normal mortgage rates. That means that you lose money by offsetting as long as you're able to get 6% on the money. There is no amount that you can put in the offset account that will make you better off so long as you're getting 6% after tax (or tax free) on the savings.

It's impossible to gain by offsetting if your savings rate is the same as or greater than the offset mortgage rate.

[Deleted User]

Is it me or are these formulas pointsless as they dont take into account mortgage value for example if I had a 50K mortgage id pay -

non offset at 5.25 - 2625 in interest each year
with a offset thats 5.6% - 2800 in interest
Thus would need 3125 quid in the bank to cancel out the interest of the higher offset rate. Assuming a savings rate of 4.5% (dont forget the tax man) id need a further 2510 quid to cancel out the interest on savings of the 3K. Thus id need about 5.5K to break even where as your formula says I need next to naff all in the bank to break even with a offset mortgage which is not true. But of course you can overpay 5K onto your normal mortgage which would make the offset not worth having unless your protecting your ISA allowances.

[Deleted User]

ptee wrote: »

The formula at the start of this thread looks really good, but very confusing to the untrained brain! Anyone know if this has been put into a spreadsheet that can be downloaded??

Ptee

first into box A2 - =SUM(((100*(D2-C2))+(B2*(F2-C2)))/(D2-E2))

title bars from a1 across -
c/ac sav non-off off current a/c saving

Its much of a muchness as I believe its pointless as it takes no a/c of mortgage value which is the most important thing.

jamesd

Keeping this thread sticky appears largely pointless except as a place to host discussions, and that could perhaps be better done with a fresh thread..

Yant1, as you say, the formulas are completely useless because they don't consider the mortgage amount on which the higher offset rate is being paid. Effectively nothing prior to post 131 is useful.

The spreadsheet in post 131 appears fine, calculating in the breakeven column the point at which savings exceed the outstanding mortgage balance, that is, when the mortgage can be paid off by savings. The offset example there (mortgage at 4.94% and savings at 5.15% after tax) is one where offsetting loses you money, compared to saving.

[Deleted User]

I agree, they need to start it again with the facts on the first page. I didnt see post 131 cos there are too many posts i read the first page and the last page and assumed in between was discussion.

I think that they are a good idea if your mortgage is a low multiple of you wage as it gives you the ability of a flexible lifestyle. But for those that constantly search out teh best rates and have 5times salary mortgages id either go with a 5year fixed or even 25 year fixed.

patp

I thought I wanted an offset until I read this thread, now I'm confused.

Looking to remortgage adn raise funds for loft extension.

total borrowing will be £122k, savings £12k + £200/m

I've compared the Woolwich base rate tracker with and without offseting (5.43% and 5.73% respectively) and assumed a savings rate after 20% tax of 4.2% as my savings are currently in a non-isa account (silly).

If I've done it right, the 5.73% offset pays off after 180 payments while simply saving would allow me to pay off the balance of the 5.43% mortgage after 162 payments.

Does this sound about right? In which case there's no point in the offset for me, even if I never get round to doing something cleverer with my savings.

Or have I got it wrong?

ptee

Do mortgage advisors have accurate calculators for offset mortgages? I rang IF to ask if they had a calculator that would allow more savings entries and they basically said no, just the one on the website. While this is ok it can only give a basic estimate.

I was all for an offset but then I was swaying back towards savings, the mrs has just given up work to be a full time mum so I'd stick the money in isas or savings account in her name and the interest will be tax free (must remember to get her to send her tax free form off!)

But then I've done myself a few variations on savings vs offset using a spreadsheet and although the final payoff date is very close it appears I'd pay much less interest with an offset

Standard mortgage (5.25%) and savings (6% isas) 133 payments - £73k interest

Offset mortgage (5.49%) and savings (0% as offset) 127 payments - £48k interest

I really need help, lol

jamesd

ptee, you'd pay much less interest on the mortgage but you'd receive much less interest on the savings. So long as the after tax savings rate exceeds the mortgage interest rate you'll be better off with savings. Since your wife is not a tax payer it'll be very easy to do better than the mortgage rate. You only gave the mortgage interest part of the calculation, not the savings interest part - it's the difference between the two that matters.

You also seem to have an error in the calculations or be using different assumptions for mortgage and saving, since it's not possible to get offsetting at 5.49% breaking even faster than 5.25% mortgage and 6% savings unless there's a difference or error somewhere.

Mortgage companies tend not to have really good calculators. I usually use the one from Egg for mortgages with daily compounding.