Offset Mortgages -- the Numbers

TighterThanTwoCoatsOfPain

cityslaphead wrote: »

Can you offset children's savings in an offset mortgage?

We have Child savings trust accounts for our 3 children and have saved a few thousand there; cn these accounts be linked to an offset?

lol, or you could not take the interest which is rightfully your childrens!!??

Or were you planning on topping the balance up further by the amount you will save in mortgage interest? :rolleyes:

Short answer... unlikely i would imagine.

ricky_south

http://www.standardlife.co.uk/content/myfreestyle/reduce/offsetting.html


on there website its says "or example, if you have a mortgage balance of £160,000 and an Offset Reserve of £20,000 you only pay interest on £140,000."

they could not miss-sell the product more if they tried. this is so incorrect it is unbelievable they can be so arrogant to explain their offset as working in such a way when it does not. the interest earnt on the money within the offset goes towards paying off the loan amount. you still pay interest on the full loan amount.

and the FSA can't do nothing about it.
standard life = taking all you money so you can have a sub-standard life.

ricky

jody04c

DiggingOut wrote: »

This seems to be discussed a lot recently, on this board and the debts board.

Lisyloo did a calculation a while back that showed you needed to have 48% of your mortgage amount in savings, although this was based on certain assumptions about relative rates. !The calculation is in this thread:
http://www.moneysavingexpert.com/cgi-bin/yabb/YaBB.cgi?board=Mortgages;action=display;num=1055772701;start=5#5

Since interest rates have moved on from there, I thought I would provide a formula which anyone can use to plug in real numbers at any time and make the calculation.

To define terms:
OffsetRate -- this is the interest rate you pay on an offset mortgage.
NonoffsetRate -- the interest rate you pay on a non-offset mortgage (generally lower)
SavingsRate -- this is the rate you can get on your savings (AFTER taxes) in a savings account if you don't have an offset mortgage
X -- this is the breakeven point. !If you have more than X percentage in savings, you will be better off with an offset mortgage, less than X you are better off with a normal/flexible mortgage.

The left side of the formula is the annual percentage interest you will pay with the offset mortgage. !The right side of the formula has two terms. !The first is the interest you will pay on your non-offset mortgage, the second is the interest you will receive on your savings.

(100-X) * OffsetRate = 100 * NonoffsetRate – X * SavingsRate
simplifying:
100*OffsetRate – 100 * NonoffestRate= X * OffsetRate – X * SavingRate
solving for X:
X = 100 * (OffsetRate-NonoffsetRate) / (OffsetRate – SavingsRate)

Obviously, the greater the difference between the rate of the offset mortgage and the best mortgage you could get otherwise, the higher the percentage has to be. !The more favourable your after tax savings rate, the higher the percentage has to be.

One of the big advantages of an offset mortgage for some people is that they run very large amounts through their current account each month, and this is set off against their mortgage, even if only for just a few days. !Since current account rates are significantly lower than savings rates, to reflect this situation the formula has to be more complicated.

Two more terms:
CurAcctRate -- the interest rate you earn on your current account balance (AFTER tax) if you have a non-offset mortgage.
Y -- the average collected balance in your current account over the course of the year, as a percentage of your mortgage balance.

On to the formula:
(100-X-Y) * OffsetRate = 100 * NonoffsetRate – X * SavingsRate – Y * CurAcctRate

Solving for X:
X = (100 * (OffsetRate-NonOffsetRate) + Y * (CurAcctRate-OffsetRate)) / (OffsetRate – SavingsRate)

X is the break-even point for how much savings you need if you have an average current account balance of Y. !So you can plug in your own numbers.

Solving for Y:
Y = (100 * (OffsetRate – NonOffsetRate) + X * (SavingsRate – OffsetRate)) / (OffsetRate – CurAcctRate)

This formula is for when you know how much savings you have (X) and are trying to determine what average balance you need in your current account to benefit from an offset mortgage. !Y is the break-even point -- more than Y, and you would benefit from the offset mortgage.

Caveat:
This obviously does not reflect differences in fees, the necessity to keep remortgaging to maintain the lowest rates, etc. !It compares non-flexible mortgages to offsets. !A flexible mortgage may be able to accomplish the same thing as an offset at lower price, if your money is in savings rather than your current account.





And I thought all I had to do was find the lowest rate!!!:rolleyes:

LULULU1

We are thinking about taking out a tracker with First Direct.

I noted the comments re standard life

On there website its says "or example, if you have a mortgage balance of
£160,000 and an Offset Reserve of £20,000 you only pay interest on £140,000."

The poster says this is not correct.

Is this the same with First Direct as they have assured me all accounts are linked and that the interest you pay is as above.

whu

LULULU1 wrote: »

We are thinking about taking out a tracker with First Direct.

I noted the comments re standard life

On there website its says "or example, if you have a mortgage balance of
£160,000 and an Offset Reserve of £20,000 you only pay interest on £140,000."

The poster says this is not correct.

Is this the same with First Direct as they have assured me all accounts are linked and that the interest you pay is as above.

This is correct for an offset with FD - if you are not sure phone them and they will clarify

getmore4less

LULULU1 wrote: »

We are thinking about taking out a tracker with First Direct.

I noted the comments re standard life

On there website its says "or example, if you have a mortgage balance of
£160,000 and an Offset Reserve of £20,000 you only pay interest on £140,000."

The poster says this is not correct.

Is this the same with First Direct as they have assured me all accounts are linked and that the interest you pay is as above.

Not sure what that rant was about it is not explained that well.

The reality is that it makes little difference how they operate the account if the aim is to pay it off.

You put money into the mortgage account or the offset pots and they charge interets on the net borrowings, most do this daily and add it once a month.

With some offsets that have a repayment schedule for the main mortgage account you get the choice to reduce term(keep payments the same and overpay capital) or reduce payments.

I don't have a FD offset but people say that it operates as an IO schedule not sure if you have this option to keep your payment the same or they just take the interest.

ricky_south

only woolwich and Intelligent finance are the only proper flexible offset mortgage that operate like most people think offsets do (like the post above stats).

getmore4less

ricky_south wrote: »

only woolwich and Intelligent finance are the only proper flexible offset mortgage that operate like most people think offsets do (like the post above stats).

I think you need to explain how you think the others operate in more detail if you want to make a point.

koneka

Thank you Digging_out for your initial post. It gives an option to evaluate where you stand.The reason lenders are marketing offset mortgages as they don’t sell enough of them. People just don’t go for them because they don’t understand them! With a careful planning many people can reduce life of their mortgage. I know few people with offset mortgages and none of them wants to change them. Yes interest rate is higher, but you have to remember that you money actually working harder for you as, plus you have access to your savings.

Anon

getmore4less wrote: »

I don't have a FD offset but people say that it operates as an IO schedule not sure if you have this option to keep your payment the same or they just take the interest.

With First Direct, the main payment is interest only - you have the option to set up an additional standing order at the start to run alongside this to pay off an extra amount so that is mimics a capital repayment mortgage (or leave it as interest only and indicate how you are going to repay the capital). Once the standing order is set, it is apparently your responsibility to change the standing order if interest rates change (if you want it to continue to mimic the capital repayment mortgage) to ensure that it pays off the mortgage over the term. Their CS will help to calculate the standing order amount required if you need them to and can change the standing order (though you can do this yourself with online banking).

Anon