Offset Mortgages -- the Numbers

Jigsawpuzzle_2

Hi there,

We're looking at remortgaging at the moment, our fixed rate is due to end 30/11 and will go up to +0.75 BOE. Thinking about offset mortgages although finding it really hard to know if it would suit us.

Both basic rate tax payers, with about 10,000 pounds in savings and 2,500 pounds going through current a/c each month - since our mortgage is only for 52,000 pounds would we have enough savings to make offsetting worth considering - most examples I've seen say for 100,000 mortgage you would need around 20,000 savings...

The reason that offset looks attractive is to overpay but still have access to our savings if needed at some stage in next few years

Any advice would be brilliant - planning to speak to an IFA at some stage but trying to get my head around the basics first!

Thank you!!

MarkyMarkD

It doesn't matter how much "goes through" your bank account; what matters is your AVERAGE current account balance.

And if you have £10,000 in savings, can you not simply borrow £10,000 less than your current mortgage, or indeed borrow the whole £52,000 on a flexible mortgage (but not an offset) and then repay the £10,000 so that it's available immediately as a drawdown?

Offset is rarely the right answer.

KiKi

Hi there - quick question which I hope isn't stupid.

I've read a lot of information that says you should *always* use your ISA allowance before putting that money into your mortgage.

However, with my flexi mortgage, if I put £3K a year for three years into the savings account with my mortgage to offset it, I'd make marginally more over the three years than the interest I'd make from an ISA. So is it the case that it *is* sometimes worth putting the allowance into a offset mortage, or does it sound like I might have misunderstood something about the ISA (which is very possible)?

MarkyMarkD

If you wouldn't otherwise use your ISA allowance now, but you might have sufficient spare cash to fully use your ISA allowance in the future, then the advice you've heard might just about make sense.

Because once you've missed out on some ISA allowance, you can't get it back.

But I don't really believe this argument holds water for many people, as the total ISA allowance (including shares) is way more than most people save in any year in their lives.

Although I don't believe in offset, i HAVE cashed in all my TESSAs and ISAs and paid the money off my mortgage because it's better for me to do so at the moment and because I don't believe that losing that ISA allowance for the future is an issue.

KiKi

Hi there MarkyMarkD. (Can I call you Mark?!)

Forgive me, but what does it mean to say that "once you missed out on some ISA allowance..."? I could put money into an ISA now, but I could do it next year, or probably any other time in the future as things stand for me. Do you mean that once you've had a cash ISA for three years, that's it? You can't open a second one later in life? Sorry, I don't know much about ISAs; probably quite evident. (I would only invest in a cash mini ISA, though - I'm not talking investing, here.)

In my mind, it makes sense to me to put the full £9K into a mortgage; that saves thousands if you offset it....so I guess I just don't understand the argument for earning £700 in a cash mini ISA when over the three years in an offset mortgage it would effectively earn me more.

But I'm not sure if maybe I've misunderstood...

KiKi

Wow, I think I'm very thick when it comes to ISAs because I'm not understanding much here. !!!

I know that if I don't use it in 2008, then that's tough, I have to get one in 2009. But I guess what I don't understand is: why would I want to put the money in an ISA when it would save me more if I offset that money against my mortgage? Is there a benefit to an ISA that I've just not realised?

When you say "if you don't use it you've lost it, including for the years after the mortgage is paid off" - what do you mean? The rules for ISAs aren't different if you have a mortgage for not, are they?

Sorry if I'm asking really stupid questions...I just want to make sure I'm doing the right thing.

Thanks for answering the last question, James.

ETA - okay, James' reply just disappeared so now it looks like I've replied to nothing..!

Bernie

KiKi wrote: »

why would I want to put the money in an ISA when it would save me more if I offset that money against my mortgage?

...with IF you can hold your ISA (and your partner's) in the offset. Your ISA would earn no interest but "saves" the interest on an equal amount of your outstanding mortgage. Each year you can transfer cash from an offset deposit account into the ISA. This is what my wife and I are doing, slowly moving all our cash deposits behind the tax-free ISA wrapper while we pay down our mortgage.

I think offset mortgages are great! Ours has saved us cashing in our ISA deposits (for house purchase) that we've built up over the last 11 years. We expect to have all our cash to be earning tax-free interest when we retire in the next 10 years.

:beer:

KiKi

Oh, I see - doing *both* makes sense to me!!!

There's just a lot of promotion around *always* using your ISA allowance first, even before offsetting your mortgage, and I just can't see the benefit of that.

Maybe I'm just missing something, though, or maybe I just have a very good rate on my mortgage which means it's not worth me getting an ISA!!!

Thanks, Bernie.

jamesd

KiKi, sorry I wasn't fast enough deleting my post. If the ISA doesn't make sense it's because you have a bad (high) rate on your mortgage, not a good one. Normal enough for new mortgages today, it's those with fixes or good deals who can benefit most.

Offset accounts that let you offset with cash ISA money have a role here, since then you get the best of both worlds.

MarkyMarkD

KiKi wrote: »

Hi there MarkyMarkD. (Can I call you Mark?!)

Forgive me, but what does it mean to say that "once you missed out on some ISA allowance..."? I could put money into an ISA now, but I could do it next year, or probably any other time in the future as things stand for me. Do you mean that once you've had a cash ISA for three years, that's it? You can't open a second one later in life? Sorry, I don't know much about ISAs; probably quite evident. (I would only invest in a cash mini ISA, though - I'm not talking investing, here.)

In my mind, it makes sense to me to put the full £9K into a mortgage; that saves thousands if you offset it....so I guess I just don't understand the argument for earning £700 in a cash mini ISA when over the three years in an offset mortgage it would effectively earn me more.

But I'm not sure if maybe I've misunderstood...

You can call me Mark, or anything else you like.

What I meant about "losing ISA allowance" is that the cumulative amount you can save in an ISA goes up by the annual limit each year, but only if you use that annual limit. Any unused limit is wasted forever.

Bernie (who posted after you, and before this reply) is the master of maximising use of ISA allowances whilst also offsetting mortgage balances, so it's worth trying to understand what he's saying to you. MMD