Offset Mortgages -- the Numbers

Fairfield_2

Thanks for your comments MarkyMarkD.

I do want to retain access to the £15k as it's my emergency cash but want it to work harder. I'll have a look at the lowest flexible rates (non-offset) - as you say they do exactly the same as an offset.

I'll come back the board when I've figured it out.

PS. Thanks for pointing out my calc error.

gerrysludden

Hi everyone - hopefully someone might feel able to offer advice

We (my wife and I) currently have an offset mortgage with a rate of 6.7%. At the moment we are lucky enough to pay no interest due to the savings deposited, but do repay the capital each month. We are about to build a home extension that will reduce these savings by around £40,000, therefore meaning we will pay interest on this figure.

We plan to repay this £40,000 capital and interest over about 10 years and can budget £300 per month to do so. My questions are as follows.

1. Is it better to leave the £300 in our mortgage/savings account each month therefore offsetting and reducing the outstanding balance, or...

2. Put this £300 in a cash ISA over the next 10 years or so (I can also afford to put this year's limit of £3000 into a cash ISA - but would lose the benefit of this offsetting the mortgage if I did so) or...

3. Leave the £300 in the bank each month and transfer to a cash ISA as a lump sum at the end of each tax year.

I'm afraid I don't know enough about how interest is calculated etc... to make the decision with any real certainty.

Any help/advice would be gratefully received.
Thankyou

jamesd

gerrysludden, compare the after tax interest rates and put it in the one with the higher rate. No tax on cash ISA's so those are just used as is. When putting money into cash ISA's there's no benefit from delaying.

First step is probably to get a decent mortgage rate now you'll be paying interest. 6.7% is pretty bad unless you've had credit problems.

gerrysludden

Thanks jamesd

The problem with switching mortgages is that we have our savings alloctated in about 12 different sub accounts - depending on the purpose. These range from holidays, car savings, money for birthday and xmas presents, quarterly bills etc.... with money being allocated to each one every month just like a direct debit. In this sense the Oneaccount serves us very well and the functionality makes the rate acceptable - it would'nt be if we had more interest to pay (if our savings were less).

I suppose my question was whether the compound nature of interest with the ISA would have any benefit over simply leaving the money in the Oneaccount.

I understand that we basically get 6.7% as a savings rate on anything left in the account, but dont know enough about interest calculation to work out if there's any way to make more use of the money - if an ISA was calculated on the closing rather than the average annual balance for example

jamesd

The main ISA benefit is that the money can stay in the ISA even after the mortgage is paid off, so you can keep the tax free savings benefit for far longer. But the mortgage interest rate here is sufficiently high that it's a bit difficult to find ISA rates that are higher than it.

What I'd be inclined to do is get rid of the high rate mortgage, get a flexible mortgage or offset mortgage with a competitive rate (say 5.5-6% range) then exploit the interest rates from regular saver accounts and cash ISAs being higher than the more competitive mortgage interest rate. You can do things like having four different regular saver accounts with the Skipton BS, one for each purpose, each getting 7.55% before tax, 6.04% after basic rate. Or there's the 7% before tax, 5.6% after basic rate tax fixed rate account option from another place.

But this depends on whether you're happy enough to do online managing of different accounts to save money or just find it worth paying to do it in one place. It will make you better off, but you still might think it's not worth the work, even with the easy online banking places offer today.

MarkyMarkD

Gerry

You could achieve the same functionality with a spreadsheet. You are paying a lot of money for them to basically divide your money up into different pots.

gsc

I'm struggling with the formulas to work out if offset or standard mortgage is better for me. Can anyone please help???!

offset rate = 5.89%
non-offset rate = 5.73%
savings account = 5.5% (normal rate taxpayer, non-ISA)
mortgage amount = 200k
term 21 years, interest only. Likely to move in 5 years or so.

The offset mortgage is a very simple one - mortgage and savings 'pot' only (no current account). Have about 12k of savings that we'd like to keep readily available.

How much would we need to keep in the savings 'pot' to make the offset rate work better than the standard mortgage?

Thanks in advance

jamesd

gsc, if you aren't already fully using your ISA allowances it'll take 7200 a year each before there's any chance at all of the offset being better because ISA interest rates and investment returns are higher than the interest rate on the offset mortgage, so it doesn't make sense to use the offset mortgage at all while those are still unused.

The offset mortgage costs you 320 more a year in interest so that's how much you have to save by offsetting.

12,000 in savings at 5.5% before basic rate tax makes 528 a year in after tax savings interest. 12,000 in the offset account reduces the mortgage interest by 706 a year. That's a cost reduction of 706-528 = 178 a year. Not enough to match the 320 target. To get there and just break even with the offset mortgage would take about 22,000 in the offset account.

But you're getting a low rate of interest on the savings. If you were getting 6.3% before tax you'd get 604 in interest each year and would need 38,000 in the offset account to be ahead. And there are regular saver accounts paying 7.5% or fixed rate accounts paying 7%. Also ISAs for above 6% tax free.

So the best plan looks like using ISA allowances and/or regular saver and conventional easy access savings accounts. You'd need to be adding more than 14,400 a year (the ISA limit for two people) to the savings each year before there'd be any real chance of you being better off with an offset mortgage at those rates.

gsc

jamesd - thanks v much for that, really appreciated.

My wife and I both have our full ISA allowances and were planning to leave these where they are (adding to them in April), and just offset the non-ISA savings.

The arrangement fee for the standard mortgage is £400 more than the offset, so there go the first year's savings - but after that it looks to be a better deal with the standard one.

thanks again

hi123

hi
i wanted to get opinion from the experts as to which is the best rate available for offset,preferably current account mortgage
am currently at bbe and 0.75%
is there any cheaper option