Offset Mortgages -- the Numbers

fpa_2

I am trying to understand the full details of the offset mortgages and their `worth` against savings accounts, but I am struggling a bit so my question might be stupid:

I am in the process of buying a new house and my current savings are exceeding slightly all the costs of the house purchase. I was thinking of buying the house with my cash, but then I know that I will be left with little savings.

Do you think an offset mortgage would be suitable for my case as I could make sure that my offset savings are always equal to the mortgage amount and in this way I would have more flexibility and more money really to spend elsewhere if necessary? Or have I misunderstood the whole concept?

My idea was to pay 50% cash and then get an offset mortgage (say from first direct) for the remaining 50%.

Thanks for any help!

getmore4less

Depleating savings does have a bit of a risk if it will take a while to rebuild

Having no savings is handy for benifits.

If you want access in case you do need an offset is ideal just go 100% offset and it costs nothing till you draw the money.

I would go for the lowest costs over lowest interest.

fpa_2

Thanks for the reply.

Not interested in benefits obviously , the interest rate I get for my savings is 2.9% and I am a high rate taxpayer, doesn't this justify going say for the fee free first direct offset and have it 100% offset?

no1catman

fpa wrote: »

Thanks for the reply.

Not interested in benefits obviously , the interest rate I get for my savings is 2.9% and I am a high rate taxpayer, doesn't this justify going say for the fee free first direct offset and have it 100% offset?

The money that you allocate to your off-set account:
Does not get any interest, but it saves you mortgage interest - i.e. the money you would have paid mortgage interest is instead used to reduce the capital owing.
You do not now pay any tax, on your savings, but it is still there to use - should you need it, which wouldn't be the case if you bought the house 100% cash.

Trying_to_be_good

Another option (if you go down the offset route) is to start moving your offset cash savings to cash ISAs at a rate that would beat your mortgage interest, so whilst you then pay a small amount of interest, you'll have the tax-free interest on the ISA for life, rather than just the length of the mortgage.

getmore4less

Trying_to_be_good wrote: »

Another option (if you go down the offset route) is to start moving your offset cash savings to cash ISAs at a rate that would beat your mortgage interest, so whilst you then pay a small amount of interest, you'll have the tax-free interest on the ISA for life, rather than just the length of the mortgage.

Barclays(there may be others allow ISAs to offset so you can protect ISA stutus when interest rates on the ISAs drop below the mortgage rate.

Accumulating interest into ISAs is a good option when it pays/neutral/(small loss).

Castleman

Hi all,

thinking about mortgage as a FTB (buying end of this year - possibly) and looking into options.

What sort of amount do you generally need to have in savings to make it worth while? Situation is:

deposit = 40% of house cost
mortgage income multiple = 3x
rainy day savings in ISA = 15% of mortgage amount

any recommendations or advice gratefully received!

getmore4less

Castleman wrote: »

Hi all,

thinking about mortgage as a FTB (buying end of this year - possibly) and looking into options.

What sort of amount do you generally need to have in savings to make it worth while? Situation is:

deposit = 40% of house cost
mortgage income multiple = 3x
rainy day savings in ISA = 15% of mortgage amount

any recommendations or advice gratefully received!

These days the differential on rates is quite low so it is more about the need/desire for the flexability that the offset offers. Many normal mortgages can offer enough flexabiliy for many people.

ISA are use or lose so worth keeping, not all offsets allow ISA offsetting barclays is one that does but their deals are not as good on rate/fees as some others.

eg
http://www2.firstdirect.com/1/2/mortgages/our-latest-mortgage-offers
First direct with LTV of 60%
tracker
base+1.89% £499 fee
base+2.09% fee free

tracker offset
base+2.09% £499 fee
base+2.39% fee free

So only a 0.2%/0.3% differential.
There are ISAs that will better these rates so no need to offset

If regular savings were say 1% below the high mortgage rate
M=mortgage, S=savings, Tr=tracker rate Or=offset rate
(M * Tr ) - S * (Or -1) = (M-S) * Or
S= M(Or-Tr)/1
SO for a £100k loan £20000 savings

fkerr

I have been offered a mortgage with the Clydesdale Bank. I have provisionally gone for a Flexible Offset Capital % Interest Discounted SVR with a current rate of 3.29%. I was wondering if this is good offer. I have very little savings to offset the interest. I am a first time buyer with a 50k deposit looking to borrow 100k. The arrangement fees are approximately 600. Can someone advise me if this rate is attractive just now.

Fraser

Special_T

Not really thought about Offset Mtges before, but notice that a couple allow offsetting against other family member deposits. Just a thought, would there be any implication if we arranged to 'split' the interest between us? For example, interest on mortgage is 4.99% with the best on savings around 2% net. If we offset parents saving but 'pay' them say 2.5% we would both be better off. Have I missed something here?

Also, I note that there is no ability to overpay without penalty during the fixed term. If we did 'offset' but kept repayments at the higher amount (as if borrowing the full amount) would this be classed as overpayment?

Thanks