Offset Mortgages -- the Numbers

jamesd

little miss messiah, you're being daft paying 6.75% for an offset mortgage when they are available for less than that. You're probably paying about 1,300 a year more than you need to because of the poor mortgage deal.

Just to be sure that your mortgage and offset situation is clear:

Property value 155k 2.5 years ago, any idea of the current value?
Initial mortgage 138k, loan to value just under 90%, now capital owed is 127k due to repayments and overpayments (82% of 155k).
Offset account balance 32k.

At the 155k value you'd get to 75% loan to value by using 11,000 of savings but your property has probably risen in value and that may mean that a new valuation would already put your mortgage loan to value below 75%.

Using savings to pay for the car is fair enough. Finding out why you were declined by getting your credit reports is your next step, so you can see what's wrong on your credit record that might prevent you from getting a decent mortgage deal.

BabyBoots

Some people here obviously know what they are talking about! Please can you help me?

I have £47k current a/c and savings offset on £158k mortgage at 6.7%. Otherwise I assume I could get around 4.5% after tax on another savings account?

The offset was intended to be helpful for irregular income - future income being uncertain but sometimes I've been able to put extra in the offset in the 2 1/2 years I've had it.

Am I still best to offset?

jamesd

Offset looks fine if you still need that variable income protection. It is worth looking for lower interest rates, though.

You should also probably use your full ISA allowances each year. Here's the list of the best cash ISA accounts. The fixed rate deals currently look particularly interesting. The ISAs provide benefits that last far beyond the end of the mortgage and can provide the basis for early retirement, so they really should come ahead of mortgage or offset overpaying most of the time, even if the rates are a little lower. The great deal is the stocks and shares ISA because of the far higher long term growth potential - 12% a year is the long term UK large company market average.

rachmear

Hallo.
Oooh my first post after a long time lurking!
Hope i am not being too cheeky but was hoping someone with a financial mind could help me.
I am currently coming to the end of a 2 year fixed mortgage with Northern rock My payments are due to go up by £100!!
I have been looking into getting an offset mortgage but dont know if i will be any better off.
My house is worth£150000, my mortgage is £60000. I have £12000 in savings and am hoping to start overpaying my mortgage by anything up to £500 a month.
Would I be better off getting a shorter term mortgage (15years) and paying more per month or getiting a longer term(20 years) and overpaying it.
Also i have looked at the posts above but am still unsure if i would be better off with an offset. I want to keep my saving if i can which are currently in a cash ISA.
Thanks for any help I get

missprint

Hi rachmear....Just to point out that some offset mortgage lenders (eg Intelligent Finance) will allow you to include cash ISAs in the offset plan, so you don't have to 'lose' these savings.

rmb282

My Wife & I have a house worth circa 180k, and have had a 100k openplan mortgage account for a year or so, it started at 5.04% and has now increased to 6.04%; however, I have an Ultimate Awards Halifax account which is supposed to pay circa 6.17% interest, a web saver paying 5.01%, my wife then has her own account with TSB which she pays her money into circa £600/month into.

My salary which is circa £3,000/month goes into my Halifax account, and I then transfer best part of it into my websaver.

Having now read my Openplan docs, and this forum it sounds like I have been really thick, and I should have been paying my salary into the Mortgage Current Account, we are now going to be doing an extension, and need a further advance or re-mortgage to raise the further 30k

What do you people suggest? Do you think I should keep the Mortgage which I'm told is now 5.79% & extend the borrowing on that or remortgage for the full £130k

stoneman

I have just been watching the adverts on the t.v. for the one account, looked like a good deal especially when you use the calculator on their site. So, I thinks lets see what MoneySaving Forum has to say. Good job I did!! Now I am really confused. Let me give you my details and see if you can give me some good advice. I am 51 years old. Interest only mortgage of £110,000 with 15 years left on it with Sainsburys bank at 6.7%, but in effect it has no end date. No means of paying it off at the end except for using the equity and probably some savings. I have about 5,000 in savings and 5000 in shares(don't ask about those at the moment) None of my savings is in, an ISA so can save a further 250 per month with ease. Should I use 10000 to pay off a chunk of the mortgage, or just keep saving and pay it off when my savings reach the point where they would cover the outstanding balance. All help will be gratefully accepted, and criticism of my ways will be taken on broad shoulders.

Fairfield_2

Hi all, hoping for a bit of sanity check from the forum members. My nationwide tracker 5.49% / £992 month is coming to an end and I have £138k left on the mortgage and 19 years to run.

I have £15k of savings in an ISA which I could contribute to an offset mortgage and I've been looking to reduce the term. By my calcs, a flexible Scottish Widows mge at 5.84% (2 years) with the offset can reduce the term to 16 years and save around £50k on mortgage vs. non-offset (keeping payments the same)

Non-offset
Mortgage = 19 years on £138k @ 5.84%(2 year); £1000 per month. Lifetime cost £239k
ISA interest = 5.6% 19 years on £15k = £25k
Lifetime cost = £239k - £25k = £214k

Offsetting
Offset mortgage = (£138k-15k) = £123k; 16 years at around £1000 per month. Lifetime cost £206k
ISA Interest = 0
Lifetime Cost = £206k

Trick:
As I've shorterned the mortgage term by 3 years I could continue to pay the £1000 month I was paying into the mortgage, now into a savings account and save an additional £41k over 3 years (3% after tax)

So total benefit of offset vs. non-offset = 214-206+41 = £49k

Even taking into account the NPV it still seems to be beneficial to offset. The only disadvantage is taking the cash out of ISA.

Note: when I ran this calc through the Intelligent Finance mge with cash ISA, it was not beneficial as the higher mge rate offset the benefit if keeping the ISA.

Appreciate any comments / criticism / help to make sure I'm doing the right thing. Have I missed something? Thanks.

MarkyMarkD

What you've missed, as in most offset comparisons, is the alternative of simply using your £15k of ISA savings to borrow less.

If you do this, you can pay a lower non-offset rate on your new £123k mortgage, rather than unnecessarily borrowing £15k more than you need but offsetting.

The total savings by taking the approach I've outlined will be more than offsetting.

And if you desperately need to have this £15k available, take a decent flexible, but non-offset mortgage product (at a better rate than an equivalent offset), borrow £138k and repay £15k the day after completion. Then you have a ready-made drawdown facility of £15k - exactly the same as in your offset, but without the penal interest rate.

Taking the money out of the ISA is a red herring if you are using it to pay down your mortgage. The only way it is perhaps relevant is if your future savings are going to exceed the ISA allowance per year, or if you are paranoid that ISAs may be abolished completely (but not retrospectively) in future.

By the way, you've also double counted the £15k in your calculation. Once you have offset it (and hence reduced the amount you are actually repaying on the mortgage) you've actually lost it because the repayment amounts don't include repaying you the £15k at the end.

jamesd

With a 5.84% mortgage you lose money if you move the ISA cash to the mortgage offset account because it's easy to get cash ISA rates above 5.84%. You may be getting only 5.6% but Ruffler Bank pay 6.14% with 30 their days notice ISA and several others are paying above 6%. There are also some fixed rates in the list that are an even better idea with variable rates likely to drop this year.

So keep the ISA and add to it so long as the interest rate is higher than the mortgage rate long term and whenever it's enough to pay off the mortgage, do that. It'll cut about four years off the mortgage.

If it ever looks as though cash ISA rates will be below mortgage rates for a long time you could move the money then.

But the big loss here is not putting money into a stocks and shares ISA, here average long term big company shares have returned 12% before fees that are typically below 2%.