Offset Mortgages -- the Numbers

MarkyMarkD

OK. It's not better to keep £2,500 in your current account just to make yourself think that offsetting is a good idea. Keep your payment dates where they are.

The FD offset rates do look quite good, to be honest! But I can't see the exact details of the product you are talking about. Are there no up front costs like legal fees and valuation fees? Are you taking account of the £295 you have to pay A&L to redeem?

jamesd

smiths84, yes, you can usefully delay them all into as late into the month as they will accept. You'll save interest on the higher average balance throughout the month.

This does not apply to any bills on which you're paying interest, like the mortgage payments themselves. Those should be paid earlier if the interest rate is higher than the mortgage rate or later if lower. If the same it's irrelevant.

MarkyMarkD, if the bills were 2,500 the savings from a three week delay would be about 90 a year. 90 in free money each year for changing direct debit days is worth having.

MarkyMarkD

No, no, NO Jamesd.

What the OP is proposing won't give three weeks' extra interest.

You can't simply pay all your suppliers three weeks later. It doesn't work like that.

If it's a credit card bill, changing your payment date simply moves the period of transactions which are paid on that payment date.

If it's a utility supplier, when they evaluate your credit/debit position, you'll be one payment down, so they'll ask you to pay more to make it up.

There are virtually no circumstances where it will actually benefit you to move your payments to be 3 weeks later, without it actually having a hidden impact on the amount of the payments.

And some payments, like council tax, (and water rates in our area) have to be paid on the 1st of the month in any case.

johna999

offset raetes are becoming more challenging. When I took mine out dec2006 my rate for the term of the mortgage was 0.39 above base rate, now with the same company its 0.69 above. I'm lucky ni don't need to change!!!

jamesd

MarkyMarkD, yes they will adjust but meanwhile you've obtained the benefit of a single deferral and the money you have gained from that may remain in the offset account.

Council tax or non-metered water rates, if a choice of day is offered, would be a good example. If you were paying on the first of the month and move to the 28th you're not going to have an extra payment to make, you've just gained those many extra days of having the money in your own account and will get to keep the money until the last payment of the year.

For a normal credit card bill it would depend on how the card company treated the move. If they shifted the due date for transactions with more interest free time to handle the adjustment then you'd see the gain from the shift because you kept the money for that many extra days when the shift happened - but this isn't an ongoing benefit.

For a zero cost purchases card deal, paying as late as possible would be the way to go so you keep the minimum repayment money as long as possible. Again, this isn't an ongoing benefit, just for one month.

For any bill where late payment results in a report to a credit reference agency, arranging payment immediately after pay day is the worst possible timing. That maximises the chance of a late payment entry on the credit report. Leaving time to get a mistake corrected is more prudent planning unless you have the cash to pay the bills even if the salary arrives in your account late.

MarkyMarkD

Fair comments, except the last point. If you have an offset account, there's no reason at all to ever fail to meet any payments.

smiths84

Thanks guys - plenty of food for thought. I think what you are saying is the only benefit is where the supplier gives me a choice of when to pay and doesn't penalise for moving the payment date ie electricity and gas. The fact it's only going to save £90 a year max puts it into perspective! But as you say, any free money's not to be sneezed at.

The FD deal is no longer available. It was a no-fees tracker (apart from exit fee). I really think it was the best deal for me, even over such a short period of time. The offsetting is just a (as it turns out very small) bonus really.
I've got a little bit of savings which I'm going to keep/add to in an ISA, rather than offset.

The next best deal I could find was the Co-op (I think it worked out about £40 a month more in payments, £25 more if you include FD's exit fee). It was a toss up between having a the slight extra security of a two-year deal or take a chance that rates/fees won't have sky rocketted come December and I'm then forced into a worse deal than I could have been in with the Co-op!

Yes I've got to pay £295 to move from A+L but to be honest, I've got no choice but to move - their alternative rates and fees are crap, so I discounted that in my calculations.

I'm interest only, but overpaying and aiming to pay the damn thing off over the next ten years.

If you think I've missed a trick somewhere let me know because I've got a good five weeks before my current deal runs out.

I have moved my mortgage every two years for the last 10 years and I do shudder to think sometimes how much all the fees etc have cost me...whether I should have taken out a longer term deal at some point - but that's moving off the subject of this thread so I'll shut up!

Thanks for all the wise words.

johngalt_2

Hi.
I've been going through the thread on offset mortgages and saw the nice formula derived by 'diggingout'. firstdirect's offset mortgage offer is still advertised.. seems too good to be true tho.. 5.25% offset rate & a whopping 10.93% on offset savings.. I'm thinking there has to be a catch here.. I'm nearing the end of my fixed term with northern rock & need to find an alternative soon..

MarkyMarkD

That's all well and good, as long as you appreciate that the 10.93% offset savings rate is spurious and you could save the same amount, on any mortgage, by overpaying or simply borrowing less in the first place.

Offsetting is only valid if you have a genuine reason to have lots of money lying around doing nothing for a substantial proportion of the time - e.g. because you are self-employed and have tax bills to pay at a later date.

But even then, a fully flexible (non-offset) mortgage will often be just as good, and have a cheaper rate.

But this FD product is very good value in any case - irrespective of being an offset - so the general principle that you shouldn't pay extra for an offset unless you'll benefit from its features, doesn't really apply.

If I could get my head around having a fixed rate, I'd even be tempted myself.

at27

Hi all,

I have been reading this thread with great interest as am having to arrange a mortgage asap with OH. He is keen to sign up to the FD 5.25% 2 year fixed rate offset mortgage and for us to both have our salaries paid into the new current account as well as regular monthly savings to increase the amount of money offsetting against our mortgage. Apart from the potential of confusion as to who is spending what money, I am not sure that offsetting is the right way to go for us and wanted to ask for your advice if you wouldn't mind.

We are looking to borrow £210,000 over 25 years and are first time buyers. We would both be able to put away around £250 each per month to offset and would also put a lump sum of £10,000 in at the beginning. Would anyone be able to advise on whether an offsetting mortgage is even the right way ahead for us and if so, if us combining all income into one current account would work?

Many thanks in advance