Offset Mortgages -- the Numbers

JohnG

Hi Jamesd, Busyb,

Further to the subject/question of fully offsetting - I think I understand most of the ins and outs (I think) of keeping the offset/mortgage in place though the thought of merely keeping it in limbo doesn't excite me too much. I would want the savings aspect to do more if that were possible?

The fact that our current account is linked to the offset presumably will help, providing we have a decent average in credit each month? Or is it corrrect that once your saving/current account balance exceeds the outstanding mortgage, the excess is surplus to requirements and won't save interest and reduce the mortgage anymore?

Or would the mortgage provider (C&G in our case) be happy to keep crediting additional interest on whatever savings we have in the offset - somehow I think not .

As you can see I remain slightly confused and consequently keep going back and forth on what way to go - pay it all off or keep offset savings and mortgage in place?

Hoping for any futher clarification if possible?

Cheers
John

jamesd

JohnG, once the mortgage is fully offset there's usually little or no interest paid on the excess.

Linking the current account is roughly comparable to not paying interest on your average current account balance. If you manage your current account tightly and keep most money in a savings account this might be only a few hundred or thousand. Worth saving but not a huge effect.

Keep the offset and mortgage in place. Then you can borrow at the mortgage interest rate whenever you need ot finance something. Car or whatever else.

Or you could look at investing some of the money in the offset account. Take a look at say Blackrock UK Absolute Alpha Fund which has so far managed to deliver very stable stock market returns when the general markets have been bouncing around. With 9% or so return in the last year it's more interesting to have that and pay mortgage interest, gaining 3-4% on the deaul (investment growth less mortgage interest). But this is not a guaranteed return and it could stop doing as predictably. Since the return is in growth form there's not even any tax to pay on it unless the growth exceeds your capital gains tax allowance.

busy_b

JohnG - it's good to see someone else with a similar dilemma to me - i thought I was going mad!

I get peace of mind knowing I'm offsetting everything and that I can just forget about it (as if it's paid off). However, there's the underlying niggle that my Savings could be doing more, especially as I've just received my statement and I have £500 more in the Savings account than the mortgage balance it's offsetting. (I'll be moving the extra amount out tomorrow!)
With regards to your offset arrangement JohnG, if you do have surplus funds could you not just chip away at the mortgage and pay it off in bits. (I intend to use say 5-10k per year, (if I haven't used any of my savings) to actually pay off that amount of mortgage but I suppose it's whether your lender will allow that).

JamesD - I'd be a bit reluctant to place my savings that offset my mortgage in anything that could loose money (ie: shares), as I like the idea that in my head the mortgage is paid off (even though on paper it's not!) I'm not great at tracking interest rates, share prices, etc but been taking a look at the recommendation you make above and the return last year does seem excellent!

At the moment with offsetting 100% I have approximately £400 per month that I should now put to good use as this was the amount I was paying on my old mortgage. I am now trawling this site for the best place to put it with little risk and a great return!

bails

Hi guys, I'm not sure if this is the right place to ask so apologies if it's not. I was hoping someone could help me please? It's an interest-only offset mortgage at 5.99%, with no savings in the pot at the mo. There are savvings in an ISA. Changing the mortgage is not really an option (long story). If I can afford the repayments (and that's a big if), should I switch to a repayment mortgage and put the savings into the offset account? If it has to stay as an IO mortgage, is it still worth offsetting? Any help would be greatly appreciated, many thanks.

jamesd

The time you might benefit from a repayment mortgage instead of an offset mortgage with offset account is if you claim benefits, the amount in the offset account exceeds the savings limit for the benefit and then you get declined for the benefit until it's below the limit.

Other than that you gain nothing and lose flexibility by switching from offset interest only to offset repayment. If you want repayments, just use a mortgage calculator to work out your monthly repayment amount and deposit the difference between that and your interest only payment into the offset account. Later, if you wish, when remortgaging you can use the offset amount to reduce the amount needed for the remortgage and you'll be in the same position as if you'd been on a repayment mortgage and made the same total monthly payments.

If you can't afford to put the full repayment amount into the offset account this means that you do not end up with arrears with your mortgage lender and on your credit report, you simply have a need later, after inflation and pay increases, to catch up. If you had a repayment mortgage you would end up with those problems. You can add up the amounts you don't pay each month. Each year increase the amount by 6% and that will tell you how far behind you are with repaying the mortgage.

Don't get unduly concerned in the early years. Pay increases and inflation mean that over time it becomes easier to overpay on a mortgage. Try seeing if you can put a quarter of pay increases or bonuses into the mortgage.

There are cash ISAs paying over 5.99% at the moment so you lose money by moving the ISA money into the mortgage offset account. Just use a high paying cash ISA account. A fixed rate deal is a good idea if you think that you won't need the money.

As well as trying to overpay into the offset account you could also consider investing via a stocks and shares ISA account. Have a look at the Blackrock UK Absolute Alpha fund for one example that seems quite reasonable at the moment. You could say set up a monthly investment of fifty Pounds into it and if you can afford more you could put that into the offset account or a cash ISA. If this interests you I suggest that you do it via Hargreaves Lansdown if you don't yet have experience of this sort of thing.

Melodyx

I've got an offset account with IF and the mortgage rate is currently 7%. I'm thinking of re-mortgaging to get a lower rate and save some money but the fees involved in transferring seem fairly prohitive (legal fees, set up fees etc.) Can it be worth it?

MarkyMarkD

I doubt it's worth anyone paying a rate of 7% on their mortgage, whatever the costs of the new product are.

The only reason it would make sense would be if you were offsetting a large proportion of the balance.

Having said that, though, you should never have bought an offset unless you were offsetting a large proportion of the balance as it's never worthwhile otherwise!

You can get rates a lot below 7%, with no fees at all (i.e. valuation and legal fees refunded). For example, the Co-op Bank have a "members' only" tracker for 5.69% with no fees:

2 Year Fee-Free membership- Exclusive Tracker* (90% LTV)
(Bank of England Base Rate plus 0.44% for the first 2 years) Currently 5.69% (variable) for 2 years After two years the rate will revert to Bank of England Base Rate plus 1.00% 6.3% £0 These will apply for the first 2 years £0

Membership is free and instant, so isn't an onerous requirement. https://www.co-operativebank.co.uk

smiths84

Hi Guys - hopefully I'm in the right place to ask this question

I've just applied for a First Direct offset mortgage (its a tracker - the rate is currently 5.25 per cent, deal runs out in December)

I get paid about £2500 net a month.

At the moment pretty much all my SOs and DDs are set up to come out the day after I get paid - so I know how much money I've got left to play with for the rest of the month.
.
What I'm wondering is - should I move them all to come out just BEFORE I get paid so that as much money is in my accounts for as much of the month as possible, thus maximising the offset?
Cheers!!!

MarkyMarkD

No. I think you're suffering from "offset illusion".

What you are proposing will bring your payment dates forward a few days, meaning that the money leaves you earlier and you lose interest.

What rate are you going to pay after the 5.25% rate runs out, and what proportion of your mortgage are you going to offset with your existing savings?

The offset benefit from your monthly salary is hardly anything, especially if you have timed your payments (correctly) to go out immediately after pay-day.

smiths84

Hi - hmmnn - I just thought it would be better to keep £2500 in my account for, say, 29 days of the month, rather than for just one.

I should have said, its a remortgage fom alliance and Leicester (a tracker deal currently 5.19 per cent) .It runs out this month.

Only fee is 125 exit fee (if I don't take out another FD mortgage)

I did research the market and it seemed like the best deal available for my £95,000 re-mortgage , even with the exit fee.

when it runs out, I'm going to remortgage again..