Offset Mortgages -- the Numbers

jamesd

wiggers, for likely mortgage amounts saving 6.8% less say 4.5% after tax on lost savings account interest on just 7000 isn't going to be enough to compensate for paying 6.8% instead of 5.8% on the rest of the mortgage balance.

wiggers

You also earn interest on your unspent salary, on a daily basis, and that is compounded monthly. Not to be sneezed at!

PS. Just done an analysis for my own circumstances. If my monthly salary is left unspent for 25/30 days each month then over 25yrs at 6.8% I'd save just over 10k. A 1% drop in the mortgage rate over 25yrs would save me 11k. So that feature in itself more or less pays for the difference. Then you have to consider the interest 'earned' on the big bills that only come around once a year and the fact I don't spend all my income every month it makes good economic sense.

lizzo

I have also been reading these posts with great interest, and the more I try to inform myself about Offset mortgages the more they seem right for me. However, I am very confused about which one to go for. I have had the Woolwich recommended to me by London and Country, and they say that if I offset my savings I will pay my mortgage off at least 2 years earlier, Making 11 years instead of 13. BUT when I put in my finances into the One Account, (exactly the same as I gave L and C,) by only paying £15 more per month, it shrinks my Mortgage time to *4* years!! How does this work, why are the results so different? Is the One Account too good to be true? I would welcome your comments, experiences, advice, as I am due to remortgage at the end of July. I am currently with Nationwide on interest only (long story!) Oh and what does % used for comparison mean?

Hobo_2

jamesd wrote: »

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.

Woolwich/Barclays also allow cash ISA offset

http://www.personal.barclays.co.uk/BRC1/jsp/brccontrol?task=articleFWgroup&value=8704&target=_self&site=pfs

jamesd

wiggers, did you calculate that 10k saved using 6.8% or 6.8% less the lost interest on a savings account?

In_Search_Of_Me

Wiggers my one account isnt my account! I have a seperate account where salary goes and another one where bills are paid from which was what I meant! However, have managed to negociate (as per Matrin the Marvellous' advice!) and get a drop in interest rate for free for a year! WIll make the overpayments & try to pay an additional £30 a month which would be a £60 overpaymet a month which will apparently save me £27,000 and 5 1/2 years off the full term of the mort!! Was gobsmacked and now feel better informed about how it works. May also arrange for my spending money to go to my one account (yet to be set up!) so saving more money monthly and leave the DDM's where they are! No seperate account for DDM's with one & I'm not brainy enough to have them all lumped in one place!! THanks for advice - a real help for the mathemtcally dyslexic like myself!

jamesd

lizzo, can't really say what is happening without knowing the numbers.

wiggers, just to check, that means you keep about 6000 in the account for most of the month until the bills are paid and your mortgage is for about 59,000. So you're keeping about 10% of the mortgage amount in the associated current account.

I'm still a bit surprised that you don't think it's worthwhile to transfer your salary to an offset savings account then set up standing orders to transfer the money to your current account before paying bills, while using an offset mortgage. That way you'd be able to save both most of the the 10,000 and the 11,000. Monthly salary of 10% of the mortgage does make getting or saving interest on that salary look attractive, however you do it.

fishface-69, to be even more gobsmacked, try the Egg mortgage calculator and put in monthly overpayments until the total paid each month matches what the One Account payments are with your overpayment. Use the interest rate for your favorite non-One Account offset or lifetime tracker mortgage.

lizzo

jamesd, the numbers in a nutshell are Mortgage 45000, savings 26000, monthly income net 1150. (which will still be the same when I fully retire) I am 57, so apparently can only get 13 yr term. Although if I continued with my Nationwide mortgage there are 18 yrs left to go. I paid interest only over the last 7 years on the advice of FA as I have no children etc, he said you might as well never pay the capital off, therby having more money in my pocket now. But now I would prefer the security of paying off my mortgage. Would welcome comments re offset and my previous post.

jamesd

lizzo, that helps to explain why the One Account said your mortgage with them would be paid off so much faster. When you put savings into the account they treat them as though you want to use them to pay off the mortgage. So instead of the time to pay off 45,000 you were given the time to pay off 45,000 - 26,000 = 19,000. Not a surprise that it takes much less time to pay off 19,000 instead of 45,000!

The current interest rates for the One Account depend on loan to value, the percentage of the property value that the agreed borrowing limit amounts to. Here are the interest only monthly interest payments for you at each rate for both the 45,000 and 19,000 amounts, so we can use them to compare against not offsetting later. I also include the Egg lifetime tracker offset mortgage at 6.25% for LTV up to 95% as a comparison; it's available until age 70. Also the ING flexible mortgage that's currently 5.64% and can vary up to BoE+0.9%; available up to age 75.

LTV		rate/for 19,000	45,000
up to 50%	6.60%	104.50	247.50
50-75%		6.70%	106.08	251.25
75-80%		6.80%	107.67	255.00
80-85%		6.90%	109.25	258.75
85-90%		7.05%	111.63	264.38
90-95%		7.20%	114.00	270.00
95-99%		7.45%	117.96	279.38
Egg 6.25%	6.25%	98.96	234.38
ING 5.64%	5.64%	89.30	211.50

Now lets look at paying off a 19,000 mortgage over 13 years, assuming you use your savings to offset.

The One Account 6.60% interest rate leads to a monthly repayment mortgage payment of 181.74.

The Egg 6.25% interest rate leads to a monthly repayment mortgage payment of 178.20. That's 181.74 - 178.20 = 3.54 less than the One Account so we can use that 3.54 as an overpayment on the Egg mortgage and still pay 181.74 a month. Overpaying like that cuts the mortgage term to 12 years 8 months and saves 288.45 in interest payments compared to the One Account.

The ING 5.64% interest rate leads to a monthly repayment mortgage payment of 172.13. That's 181.74 - 172.13 = 9.61 less than the One Account so we can use that 9.61 as an overpayment on the Egg mortgage and still pay 181.74 a month. Overpaying like that cuts the mortgage term to 12 years 1 month and saves 649.75 in interest payments compared to the One Account.

Each of those options leaves you with no savings or mortgage at 70. If you wanted to keep the savings all the time and pay off all of the mortgage here are how the payments work out:

One Account 6.60% 430.44 a month
Egg 6.25% 422.06 a month, reduces to 12 years 8 months and saves 682.84 if pay 430.44 instead.
ING 5.64% 407.67 a month, reduces to 12 years 1 month and saves 1,539.48 if pay 430.44 instead.

So those show how much you could save compared to the One Account with a couple of alternative mortgages. I've ignored fess in this because these are just example interest rates to show the effect.

If you kept all of your 1150 in the One Account until the end of the month you'd save 6.35 a month in One Account interest each month. If you used one of the other mortgages and kept it in a current account paying 5% gross, 4% net you'd earn 3.83 a month in interest to use reducing the mortgage payments. If I add those interest savings or gains to the 45,000 mortgage numbers they change to:

One Account 6.60% 430.44 a month less 6.35 = 424.09
Egg 6.25% 422.06 - 3.83 = 418.23 a month, reduces to 12 years 11 months and saves 244 if pay 424.09 instead.
ING 5.64% 407.67 - 3.83 a month, reduces to 12 years 4 months and saves 1,137.12 if pay 424.09 instead.

If you wanted to end up with no savings by using them for the mortgage it's closer. The Egg mortgage was just 3.54 a month cheaper than the One Account and putting your money in the One Account instead of the interest paying current account saves you 6.35 reduced One Account mortgage payment - 3.83 current account savings interest = 2.52 a month. Not quite enough to be better than the 3.54 a month cheaper mortgage but it's close.

However, there are more profitable things to do with your savings than use them to offset the mortgage. For up to 25,000 you can get around 10-12% before tax lending to consumers in Zopa's C market for 3-5 years. In a stocks and shares ISA emerging market bonds can pay 8% or more and equities can do better than that if you can handle more ups and downs. Use the savings in these ways, pay an interest only mortgage and put what you can afford of the difference between interest only and repayment into the investment pot as well and it becomes more likely that you could pay off the mortgage and have some savings left over. Something to discuss in the Saving and Investing section if you're interested.

lizzo

jamesd, thanks very much taking the time to give me such an in-depth reply. Now I need to read and digest it, to help me make my decision about my remortgage at the end of July, cheers!