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Offset Mortgages -- the Numbers
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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!!!
...that once you put a quid into the ISA, it earns tax-free interest endlessly while in it - compounded! This is why we want to stuff every penny of our savings we can into ISA for our retirement.
This is probably why so many place using your ISA entitlement as a priority too. If you don't use your entitlement each year, it is gone forever.
This is also why I am so chuffed that we did not have to cash in our ISA when buying a house, we were able to "park" them in an offset mortgage with IF, using these deposits to offset the mortgage balance.
So far, the wife's ISA/TESSA have been "sprung", moved to better paying providers and we are now half way through building up cash/paying down the mortgage to spring my pair (now combined in a single ISA). While in this situation, the surplus cash in our offset accounts generates interest in my ISA. It feels like Win-Win-Win to me...
:beer:“When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around.
But when I got to be twenty one, I was astonished at how much he had learned in seven years.”
Mark Twain0 -
The important thing to remember with any kind of debt, be it mortgage or credit cards, is to minimise the total amount of interest paid. If you have a mortgage then with any surplus income you have to decide whether you can invest it at a better rate than you are paying on the mortgage. (Don't forget to allow for tax!) If you can't invest at a better rate then use the cash to reduce the size of the mortgage itself and thereby reduce the interest payable at the mortgage rate. Unless you're tied into a deal whereby this isn't possible this is usually the best option and a flexible offset or current account mortgage allows you to do this easily.If your outgoings exceed your income, your upkeep will be your downfall.
-- Moe Howard of The Three Stooges explaining economics to brother Curley0 -
Thank you all!
Can I give you one last example, then, as you're all so knowledgeable - and then I promise to shut up about this!!!
My mortgage rate is 5.99%, £163K left. It's a flexible mortgage with the Abbey. My mortgage payment is £990 / month, and I overpay an additional £650 a month.
If I put £3000 in an ISA, then another, then another....I'd make approx £700 over three years.
If I put that same £3000 in, then another, then another in my mortgage savings pot, I'd effectively save £3900 on my mortgage over 8 years (using the online tool which shows me my payments). So pro-rata that to three years: 3900 over 8 x 12 months = £40 a month. £40 a month over three years is £1440.
So I'm better off putting it into my mortgage, than using my ISA allowance, surely, as my money will save me more on interest over three years on a debt, than it would make me in interest in savings?
Or perhaps I'm being very stupid?!
Please, please feel free to correct me! I just want my money to do the most for me that it can, so I want to get it right.
And then I promise, no more posting on the issue...' <-- See that? It's called an apostrophe. It does not mean "hey, look out, here comes an S".0 -
KiKi, your calculation error is using pro rata comparison. That gives the wrong answer for compound interest. The interest earned is greatest in the later years but the pro rata calculation moves some of that interest to earlier years, making them look better than they really are.
Any cash ISA with a rate above 5.99% will make you more interest than you save by putting the money into the mortgage. All you have to do is compare mortgage rate to ISA rate and choose the highest one.0 -
You can use this future value calculator to compare the options.
Using the 300 a month that you're allowed in a cash ISA from next April and the 6.30% NS&I cash ISA interest rate over 8 years it calculates interest earned of 8718 and total balance (future value) of 37518.
For the mortgage over 8 years interest saved (earned in the calculator) is 8216 and total reduction of mortgage balance (future value) is 37016.
37518 - 37016 = 502 better off using the ISA.
If you used the Scarborough BS My Savings ISA at 6.80% for regular savings of 300 a month (limit is 250 at the moment, but I'm using 300 to keep the numbers comparable) the ISA interest would be 9546 and the total balance 38346. 38346 - 37016 = 1330 more in the ISA after 8 years.
It's normal for there to be small variations in the numbers given by different tools. As long as you're using the same tool to compare all of the options that's not important.0 -
Hi James
Ah, okay, thank you very much for your help. Perhaps I've been a bit too literal in my calculations!!! I think my other error is that I thought you could only put 3000 a year into an ISA, for three years then you have to start again....but it looks like that's not the case.
Seems I shall have to go read the ISA articles and then the ISA forum to get a little more clued up.
Thanks, everybody, for your help.' <-- See that? It's called an apostrophe. It does not mean "hey, look out, here comes an S".0 -
Can anyone help, please? We're really stuck with what to do. We have a 275000 mortgage still to pay off, but I''ve just had to stop working. My long-term partner earns 5000 month after tax, plus we have savings of 26000. He also has a 14000 bonus annually. Obv a 40% ta payer. What's the best way to get our monthly mortgage payments down? (the term doesn't bother us)? Is an offset (First Direct?) the way to go? Thanks0
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Do you need the savings to be accessible? If not, one option is a normal remortgage that uses it to reduce the balance. But may not be ideal if the savings are in cash ISAs.
Offset mortgages are usually at higher interest rates than non-offset and it doesn't sound as though you have enough money to use to offset to compensate for that higher interest rate on the remainder.
What is the interest rate for your current mortgage and is it fixed rate or variable? Any penalty for changing?
I suggest that you have a word with a mortgage broker to find the cheapest deal. An interest only mortgage that allows you to make overpayments is one possibility. Then you can overpay whatever you can afford each month. Also worth getting a new 25 year term because nothing forces you to keep it for the whole term, it's just the limit and it gets you additional flexibility.
If you can't switch mortgage or if it doesn't make sense, you could see if your current lender will accept a switch to interest only or if they will extend the term, lowering the monthly payments on a repayment mortgage. Term changes usually have a modest fee - 100 or so - to cover the work of recalculating payments and such.0 -
Thanks for that! we've an HSBC Tracker at 6.2% for term with no penalties.
Our savings are so relatively small they won't dent that mortgage much tho...
An interest-only gives a rate of 1300-1400.
Whereas we've got so much going thro current acct each month, we'd thought that + savings + bonus would lower payments considerably. First Direct and IF seem to indicate it'll save us about 220,000 if, rather than put in lump sum each year, we filter bonus in monthly into savings AND if we manage to save even just 200-300 at month end. Can this be right?!?!0 -
Hi, I am at a loss as to where to turn. Any advice appreciated please. My husband and I have a £303,000 mortgage with a secured loan on that of another £24000. My husband earns £4000 after tax per month. Due to unemployment in the past, we have 3 months mortgage arrears. Our monthly payments are £2150 mortgage (FD offset), additional £350 arrears, £476 loan. Obviously we have a poor credit rating due to past problems and therefore have looked into remortgaging to repay arrears and loan. However, the equity is not enough. The offset is so expensive because it incurred additional borrowing that turned out to be very expensive. When we spoke to FD about changing the mortgage or helping they were not interested as we had arrears. The loan is with Welcome which is horrendous but the only people that would help at the time to repay some other debts. Any advice appreciated - feel like in a real pickle. Part of us says try to remortgage - but part of us says stay as you are as we are not increasing the mortgage any further.0
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