Offset Mortgages -- the Numbers

System

I have an offset mortgage with oneaccount from RBS, and they have not passed on any of the 2 interest rate cuts this year and just increased the borrowing rate by 0.25%, which means effectively the rate has jumped by 0.75% this year sneakily. When I phoned to complain I get a story about bank basing their rates on LIBOR rate, and not Bank of England rate, didn't the Bank of England, bale out Northern Rock and pump loads of cash into the money market recently to help homeowners, so who is kidding who. On the plus side I stoozed about 65% of my outstanding mortgage of £11K at the beginning of the year at 0% with MBNA bank, and saved myself about £75 a month on interest, so hopefully I will be mortgage free at the end of the year. I have some shares in Standard life that I am thinking of cashing in as they have not performed well and using that money to pay of almost all the balance to the oneaccount, does anyone think this is a good idea or not.

bannyboy:j

2ndBounce

This thread is a little old I know but I want to expand the discussion to current account mortgages - a type of offset mortgage. Could anyone give the formula to show how much you'd save each month due to paying your salary into a current account mortgage as compared to interest charges on a traditional mortgage? The One account has a Mortgage Shrinker but I'd like a general formula if possible.

jamesd

The benefit of having your salary paid into the mortgage account is minimal unless you're operating a business and have a high percentage of your total mortgage balance going into and out of the account each month.

For each monthly salary payment of 1000 if the salary comes in at the start of the month and all bills go out at the end of the month the gain at a 6.5% interest rate would be under 65 a year. If the payments on average go out half way through the month the gain is half of that.

A 0.5% lower interest rate on a 100k mortgage saves 500 a year and the One Account is typically at least that much more expensive than the competition. That's an extra 500 a year available for paying off the mortgage more quickly.

The likely payment of interest on competitive current or savings account balances before bills are paid reduces the possible gain by 50% or more.

The One Account is usually a poor deal compared to competing current account and offset mortgages.

You can use the Egg mortgage calculator to compare all modern daily calculation mortgages, including the One Account. Remember to make sure that the total monthly payment is the same for all deals. That usually means adding a higher overpayment amount to mortgages other than the One Account to compensate for the higher interest payments on the One Account. Add an extra 3.50 to the payment of the One Account and other current account mortgages to allow for the current account effect (assumption: 2500 monthly after tax salary, bills paid out half way through the month, competitive mortgage would have interest paid on bill payment balances to reduce the potential CAM gain by 50%, round up from 3.38 to 3.50 for convenience).

getmore4less

2ndBounce wrote: »

This thread is a little old I know but I want to expand the discussion to current account mortgages - a type of offset mortgage. Could anyone give the formula to show how much you'd save each month due to paying your salary into a current account mortgage as compared to interest charges on a traditional mortgage? The One account has a Mortgage Shrinker but I'd like a general formula if possible.

The maximum you can save is the same as if you just paid one lot of salary off the mortgage, Ie: salary goes in and all bills are paid just before the next salary goes in thats the best you can do.

So it is simply the salary*mortgage rate.

So for a 6% mortgage each £1k salary saves you £60py MAX.


Also beware of calculators, they do not take into account the interest lost on the savings when telling you about the benifits of offsetting so make it look a lot better than it is.

pippin45

Hi - just wondered if someone could give general advice - we are thinking of taking out an offset mortgage with first direct (already bank with them) at a fixed rate of 6.15% for 2 years. We don't have any savings as such, about £1K at present, but am expecting some money from house sale any time from 3months to 18months time, so thought this might be a good way of hedging our bets?
If this is too general don't worry will just have to take best guess - cheers

whu

Hi - not sure exactly what the query is but i think the basic starting point should be to compare the mortgage rates available(and fees payable) and if the FD offset compares well then go for it even if you do not have a lot to offset against - (view the offsetting as a bonus if the rate is good)
BTW just taken out a FD offset and think it is a good product as it offers flexibility for overpayments/reduced monthly interest payments if you have savings to offset- also depending on how much your mortgage is £1k offsetting could still be useful
hope that helps

rednblack

Hi all,

I have just spent all evening reading through this thread for advice and am a little confused (which isn't unusual )

I was hoping someone may be able to advise me on my situation.

I've been thinking of switching from my traditional tracker mortgage to an offset mortgage, but cannot work out if it would be to my advantage or not.

I have a mortgage of about £81k which I can switch to a tracker for 3 years currently at 5.79% with my current lender. BUT I also have savings of £25k which is in a savings/ISA account earning approx. 5%. I have seen an offset tracker mortgage deal with Woolwich at 0.99% above base rate (5% + 0.99% = 5.99%). Set up fee is £995, free legals and valuation, which sounds a good deal.

I wouldn't expect my savings to fall below £20k in the next 3-5 years. My question is whether I have enough savings to make this type of mortgage work for me or not?

Any advice would be more than welcome, Thanks in advance.

jamesd

You can make more than 5.79% tax free from cash ISAs so you seem better off by accepting the deal from your existing lender.

missymouse

i have just opened an offset mortgage with FD at 5.29 which is not bad in the current climate. both our salaries go in so will that count against the mortgage. It still seems we owe the same amount despite me being paid in the middle of this month. Does it only count when the mortgage gets paid again at the beginning of the month. It does seem a bit confusing.

should i still save some of my salary or just leave it in the current account linking with our mortgage?

jamesd

Since you can get higher interest rates from cash ISAs it's probably better to be doing that.

First Direct may only update the calculations once a month, best to ask them what to expect to see and when.