Offset Mortgages -- the Numbers

jamesd

Some possible catches:

Intelligent Finance let you offset with a cash ISA. This can let you build up your cash ISA balance and swap between their ISA and other ISAs depending on which offers the best rate. When the mortgage ends you can swap this into a stocks and shares ISA if you want, assuming the change in April next year happens as planned. This gets you a tax benefit that lasts beyond the mortgage term and possible interest rate gains during it. Cash ISAs are currently available at almost 0.5% above the mortgage interest rate so today putting the money in a different cash ISA beats using the cash ISA mortgage offset.

Some posters have reported being unhappy with the Woolwich customer service since it was taken over by Barclays and have switched to a different lender as a result.

One gain for Woolwich:

The mortgage reserve account option.

Sloganjerry

Hi All

I am very confused about what's been said about offset mortgages. People in this thread seem to be very anti-offset mortgage? Possibly rightly but what is confusing is that others I've spoken to are very convincing about them. Even 'Your Mortgage' June 2007 edition, calls the offset and in particular the CAM the ultimate in flexible mortgage???????????? Which seems to imply that these are a good bet?

I have been in touch with L & C and they have recommended a CAM with Clydesdale Bank. Its a lifetime tracker, which tracks for the lifetime of the mortgage at 0.350% above the BoE. It costs £499.00 in fees to set up. Overall cost for comparison is 6.1% APR. I was about to agree to this proposal until reading replies on this thread. Now I am unsure about what to do?? Would I be better with an actual flexible mortgage product?

I planned to have a current account mortgage so that all my wages savings and any spare money could offset my mortgage, which seemed a good idea? I am quite good with money and I do 'tart', etc. Although I realise that this is becoming harder to do. So a CAM seemed a good idea.

I need to remortgage soon. L & C are waiting for my decision? Help please?:o

Thanks!!!!!!!!

mark567

Sloganjerry wrote: »

Hi All

I need to remortgage soon. L & C are waiting for my decision? Help please?:o

Thanks!!!!!!!!

I think you are going to have to sit down and work it out, i.e. go through bank statements from the past year, see how much money you had in the account on average (end-of-year interest statements will be useful). I am going to do something similar because I'm in exactly the same situation. There are a lot of variables, so you have to remove some of them when making the comparison. I will be:

- Assuming I want to move/payoff the mortgage after 3 years (because that's a *long* time for me...)
- Assuming the mortgage is interest only (it just makes calculating stuff a lot easier, and rarely affects the deal).
- Assume I'm not suddenly going to get investment-savvy just because I'm starting an offset... I know there are a lot of clever things you can do but...
- Assume I will move house before the end of the 3 years - people tend to move a lot these days (about every 5 years in many cases).

... and then take it from there. I've done this *roughly* and compared IF with Woolwich and the cost over 3 years was about the same. Yes, I can finally see what people mean when they say there's not much in it.

For a lower-rate tax payer, 1000 pounds sitting in a current account earning 5% APR is about 10 pounds /year for the tax man, about a quid a month which is equivalent to about 0.01% interest on a 150,000 loan. That is not a heckuva lot.
Suppose interest rates are up to 20% - that's still only 0.4%, and I guess in that case with a tracker you will have other things to think about... like your next meal.

Then there's the 500 quid arrangement fee which over 3 years equates to 0.1% higher interest rate for the same 150,000 amount.

Gaad, soooo much to think about...

Disclaimer: These figures are *very* rough, and off-the-cuff. Please feel free to make your own calculations and rip mine apart .

jamesd

Sloganjerry, a CAM is the ultimate in a flexible mortgage. The problem isn't the flexibility, it's the cost you pay for that flexibility.

To see the cost you need to also find out the costs of the best offset mortgage and best flexible mortgage with overpayment and drawdown. By comparing the three you'll find out what the extra cost of the CAM option is.

A CAM at BoE+0.35 is very reasonable compared to something like the One Account premium. The lowest CAM offers I see on their site are Rapid Repay at BoE+0.89 or Flexible Repay at BoE+0.89, both for loans over 250,000, higher for lower amounts. Their offset mortgage shows at BoE+0.54% for the same amount.

Personally, I'd be very attracted to a CAM at BoE+0.35%.

antiquity_2

I've been trying to wade through all these offset mortgage posts to get my head round it...... As I understand it, if the (net) rate of interest in any savings is more than the mortgage rate, then offsetting will cost money. For ISAs your tax band is irrelevant. So, questions.....

Given the likelihood of another interest rate rise, how easy is it to get a mortgage with an interest rate lower than what an ISA pays?

Are offset mortgages generally flexible - ie you can add money to the offset and take it away at will? (Obviously this'll affect the interest that you pay!)

What's the situation with equity ISAs. Is there anyway for those to be utilised, or would I be better cashing them in and using them as a deposit (which would then reduce the mortgage repayments the surplus could be then used to re-build up the ISAs - although as I type that it seems like a silly solution!!)

I like the sound of Bernie's idea on page 11 of offsetting the whole mortgage value and effectively giving yourself an interest free loan, but I'd have to use the Equity ISAs to be able to do that. (... and accept the risk that they could go down as well as up so may end up with ISAs worth less than they are now and mortgage interest payments as well! )

I realise I may get told "it depends" - but an idea of what it depends on would be a useful first step before getting bogged down in specifics.

Any thoughts?

In_Search_Of_Me

I suspect I have been (done) as I was sold a one account mortgage by a financial adviser (whole of market & IFA) BUT I am in debt and have (unsurprisingly!) no savings so see the whole thing as pointless.
Question is whether I should change now (pref to fixed rate) or wait until hen my CC debts at least are paid off (7000)....
Any ideas? (other than why was I so trusting and blindly signed a mortg that I didnt understand..:)

MarkyMarkD

I agree with your perception, fishface. I can't see why an adviser would suggest a One account mortgage in your circumstances as you meet none of the requirements for it being a good idea.

If your CC debts are at a normal rate and you can't tart them onto a 0% or low rate, I would suggest you might as well remortgage and add them to the loan to get the rate down significantly. This is conditional on you being able to get a mortgage for that increased total amount, obviously.

jamesd

Fishface, ask the mortgage adviser to provide you with their documentation explaining why this mortgage was suitable for you. Don't give them any clues, just ask without mentioning what you've said of your situation here. It appears that the adviser may owe you redress for the extra cost of this unsuitable mortgage recommendation, unless you specifically asked for the flexibility this particular mortgage offers. Redress would be limited to the extra cost of this mortgage compared to the appropriate choice - your actual financial loss.

One possible reason for it to be suitable is if you have very variable income, perhaps from contracting. The flexibility over payments can be helfull in this case.

Is it the One Account Offset mortgage or the full One Account mortgage? The offset option is substantially lower in interest rate.

In_Search_Of_Me

Thanks for those - Apr is 6.8% Apr variable...its not linked in any way to my bank account! I have a reguar job & no way I'll be making extra payments and now looking to switch...

wiggers

fishface-69, the One Account *is* your bank account now, if you decide to keep it. Make sure that all your income goes into it and all your bills are paid from it. Try and time your direct debits so they are just before you get paid. Interest on the account is calculated daily and compounded monthly, so you want to maximise the time between being paid and your bills going out. You say you are not going to make extra payments, but every time your salary goes in you are making an overpayment! If your 7k on credit cards is at 0% and 4%, as I think you are saying in your sig, then leave that there. You're *earning* interest on them!