Offset Mortgages -- the Numbers

rockrat

Intelligent Finance allow you to transfer ISA's into there ISA's and offset them against your mortgage. this way you get to retain your ISA allowance and in effect get whatever interest your Mgage is at.

i went with them for this reason as i could not afford to overpay my magage (as i wanted to) AND fill my ISA quota each year.
now i have the best of both.

having been with them now for 8 months i am quite pleased with the online functionality to amend monthly payments as i see fit, transfer cash from mortgage in and out if needed.
the only thing that lets them down in comparison to FD is the tel hotline is not as efficient. they are OK, dont get me wrong... but it takes some beating to beat FD on the personal service bit.

shame FD dont make themselves more competative. its the same with their CCard's.

gil13

Certainly, if FD announced that thery would allow ISA to be linked and offset to their mortages they would really have a brilliant offering.. Hope they do at some point.

On another note, does anyone have a calculator that allows you to work out what the actual interest rate is when you offset money, I think there are some people are able to show if X is offset then it = Y relative interest rate.

jamesd

gil13, the change to the interest rate is usually small because you lose the savings or investment interest on the money in the offset account.

If you do want to work it out, multiply the offset amount by the best available savings account interest rate after tax - call it A. Then subtract the offset amount from the mortgage balance and multiply that by the mortgage interest rate - call it B. Add these two numbers A and B together and then divide them by the total mortgage balance. The result is the effective interest rate.

So mortgage 100,000 at 5.5% with 20,000 offset and a 6.5% before tax, 5.2% after tax savings interest rate would be calculated like this:

A = 20,000 * 5.2 = 104,000
B = 100,000 - 20,000 = 80,000 * 5.5 = 440,000
A + B = 544,000 / 100,000 = 5.44% effective interest rate

gil13

thanks jamesd, was just wondering as I have heard people refer to having say 15k offset = 0.5% less interest rate, I 've seen something like that in articles but was thinking how do they arrive at that. So lets say mortgage is 125k at 5.49%, and you offset 10k..what is the effective interest rate, then 20k,30k offset etc. the effect of this offset amount on the mortgage rate.

Locoblade

If you want to do it another way without any equations (although this is more complicated in hindsight than jamesd's sums IMHO) you'd can do it by plugging in your figures into an offset mortgage calculator.

The way I did this originally was to put my details into the FD offset calculator without any offset and when it asks to put in my existing deal rate, I typed in an interest rate 0.1% higher than the one I selected from their dropdown menu. Comparing the new mortgage monthly payment with the "old" mortgage figures, this gives me how much money a 0.1% increase costs me per month on my £175k over 21 years. In my case there's roughly £10 difference per 0.1% interest rise, so a 6.1% straight fixed rate mortgage costs me £10 a month more than a 6.0% one. Everyone will be different with this though obviously, the more you borrow over less time, the more the rise per 0.1%

From there I then plugged in various offset figures into the tool and it recalculates the monthly payments of the new mortgage (ignore the "old" figures now). When I plug in £20k the payment for the new mortgage goes down roughly £100. I then need to find out how much the £20k would earn monthly in an ISA and take that figure off, so say it would earn £70 a month in a savings account, £100-£70=£30, hence the (£30/£10)x0.1 = a 0.3% decrease in effective rate.

Its not even quite as simple as that though. You also offset your current account so if you can manage things with bills etc going out the day before next pay day (so the money sits there for nearly a month), that's effectively almost "free" savings that otherwise would have earned virtually no interest at all (unless you have a high interest current account). In my case if I could keep £3k in our current accounts for the whole month before paying everything, its roughly equivalent to a £15/month saving, so a 0.15% effective decrease in rate for me without any "proper" savings as such.

jamesd

gil13, with a 5.49% mortgage rate and 6.5% before tax savings rate, 5.2% after basic rate tax, each 10,000 in the offset account reduces the effective mortgage interest rate by 0.0232%. So 10k reduces it to 5.4668%, 20k to 5.4436%, 30k to 5.4204%.

If there was no interest on savings being lost then each 10,000 would reduce the mortgage interest rate by 0.4392%. That's close to the half percent you mention but it's not realistic because it ignores the lost savings interest.

If the savings account was a cash ISA paying 6.3% untaxed or untaxed for a non-taxpayer in a normal savings account then each 10,000 in the offset account would increase the effective mortgage interest rate by 0.0648% because more money is being lost in savings interest than saved on the mortgage.

Here's a set of tables for 6.5% before tax, 5.2% after tax with different mortgage rates and total amounts owed. The each 10k offset saves column is the percentage reduction in the effective mortgage interest rate.

mortgage rate	5.49%	savings rate		5.20%
mortgage owed	each 10k offset saves			
25000		0.1160			
50000		0.0580			
75000		0.0387			
100000		0.0290			
125000		0.0232			
150000		0.0193			
175000		0.0166			
200000		0.0145

mortgage rate	5.99%	savings rate		5.20%
mortgage owed	each 10k offset saves			
25000		0.3160			
50000		0.1580			
75000		0.1053			
100000		0.0790			
125000		0.0632			
150000		0.0527			
175000		0.0451			
200000		0.0395

mortgage rate	6.49%	savings rate		5.20%
mortgage owed	each 10k offset saves			
25000		0.5160			
50000		0.2580			
75000		0.1720			
100000		0.1290			
125000		0.1032			
150000		0.0860			
175000		0.0737			
200000		0.0645

mortgage rate	6.99%	savings rate		5.20%
mortgage owed	each 10k offset saves			
25000		0.7160			
50000		0.3580			
75000		0.2387			
100000		0.1790			
125000		0.1432			
150000		0.1193			
175000		0.1023			
200000		0.0895

And some with 6% before tax savings rate, 4.8% after basic rate tax:

mortgage rate	4.99%	savings rate		4.80%
mortgage owed	each 10k offset saves			
25000		0.0760			
50000		0.0380			
75000		0.0253			
100000		0.0190			
125000		0.0152			
150000		0.0127			
175000		0.0109			
200000		0.0095

mortgage rate	5.49%	savings rate		4.80%
mortgage owed	each 10k offset saves			
25000		0.2760			
50000		0.1380			
75000		0.0920			
100000		0.0690			
125000		0.0552			
150000		0.0460			
175000		0.0394			
200000		0.0345

mortgage rate	5.99%	savings rate		4.80%
mortgage owed	each 10k offset saves			
25000		0.4760			
50000		0.2380			
75000		0.1587			
100000		0.1190			
125000		0.0952			
150000		0.0793			
175000		0.0680			
200000		0.0595

mortgage rate	6.49%	savings rate		4.80%
mortgage owed	each 10k offset saves			
25000		0.6760			
50000		0.3380			
75000		0.2253			
100000		0.1690			
125000		0.1352			
150000		0.1127			
175000		0.0966			
200000		0.0845

Finally one for use with cash ISAs, it applies for each of the mortgage rate and savings rate combinations given.

mortgage rate	5.49%	savings rate		5.00%
mortgage rate	5.99%	savings rate		5.50%
mortgage rate	6.49%	savings rate		6.00%
mortgage owed	each 10k offset saves			
25000		0.1960			
50000		0.0980			
75000		0.0653			
100000		0.0490			
125000		0.0392			
150000		0.0327			
175000		0.0280			
200000		0.0245

All of these tables apply to every case where the mortgage rate and savings rate difference is the same. So you can use the 6.49% mortgage, 4.8% savings table for 6.59% mortgage, 4.9% savings as well, both 0.1% higher.

sarahharris_2

pippin45 wrote: »

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

I am thinking of doing the same - the best rate is 5.95%

The thing about offset is that the interest that is offset is the GROSS.

Thus if I have £100 in First Direct and am paid 6% interest (gross) then my mortgage is reduced by that 6% (not the net) so the money I would have paid in tax is in fact used to reduce my mortgage payments.

That's what makes offset so attractive.

gil13

thanks for reply jamesd, this was one of the articles I found http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/16/cmratehike16.xml

jamesd

gil13, that's one of the typical sort that completely ignores how much interest you're losing in the external savings account your money would otherwise be in. Just talks about the mortgage piece instead of the whole picture.

Most stories about overpaying mortgages have the same flaw of ignoring the interest loss on savings.

gil13

hi jamesd, that's what I thought too. interesting though and much will depend on the direction of interest rates as to what's going to be best, I suspect when they begin to fall next year more people will start to think overpaying the mortgage makes sense.