Offset Mortgages -- the Numbers

DiggingOut

Well, if you have to have 20K in your current account, an offset is probably good for you. If you are able to get a mortgage of only £47K and reduce your current account to £10K an offset probably wouldn't be as good.

If you need to keep your £20K available but can put £15K or more in a higher interest savings account (rather than a current account), then it is likely (but not certain) that an offset account is a little worse for you than some of the other mortgages available.

So the first thing is to decide about that £20K in your current account. Does it need to be in a current account, or would savings do as well? Can you tie up some of it in reducing your mortgage if you had a regular mortgage? If so, how much?

The second thing is to find out what mortgage rate you would get if you go for a non-offset mortgage.

Then, the numbers can be plugged into the formulas to determine if you are better off with an offset or not.

clioclassic

Thanks for your speedy reply mate... much appriecated. I think I understand what you have said but will get Mr Clio to read it later on... Thanks again

TheDink

Through a bit of credit card tarting, and some help from parents, I have managed to fully offset my mortgage (hooray !!).

BUT... what would happen if the bank went bust? Would I lose my savings and the mortgage would get called in to pay off the bank's debt?

How much protection do we consumers have?

Joe_Bloggs

Banks are making record profits.
If banks start failing then it will be the governments and other financial institutions that topple with them. We all end up paying for the failure of financial regulatory authorities in the end.

Rover

Bloody complicated all that !

I have an off set mortgage on a sum of 47k, interest rate is ~5.8%.

However with savings AND ~27k of credit card money (on 0% terms) I'm currently paying ~£50 a month interest instead of ~£230.

Seems to me, as other more knowlegable have said, if you have significant funds to off-set against your mortgage it's a good deal. If you haven't you wouldn't be considering an off-set deal would you ?

Robert_Sterling_3

The ratio of your mortgage to savings is 40 to 1 which is high.
Offset mortgages can be justified where the ratio of mortgage to savings is low.
This ratio and the difference between your mortgage interest rate , which for offset mortgages tends to be higher, and the "best" mortgage rate you could get are the ingredients of the sum which would decide whether or not an offset mortgage is a good idea for you.
The credit card trick is a more minor consideration.
If the 0% money was not offsetting your mortgage it would still be contributing to your income stream.
Without having all the facts to make an accurate assessment I am prepared to stick my neck out and say:-

I doubt whether an offset mortgage is the best route for you.

( This is not intended to be advice.  Just my own thought on the matter. )

Pugsley_2

I've been pondering this too. I have 2 endowments which have 10 & 20 years to run but both of which are unlikely to pay off the mortgage when their time is up.

I'm considering switching to a repayment mortgage & using the endowments to either save or see if they are worth cashing in. The mortgage is £63000 but I have £40000 in Premium Bonds & £6000 in cash ISA's. I've been thinking of an offset - but should I just pay off the mortgage with the capital?

It is likely that we will want to build on the house in the next 5 years which may cost up to £50000 I expect. Any thoughts to help me through this maze??!??!

Robert_Sterling_3

With £40000 in premium bonds you are gambling away some of the interest ( About £2000+ pre-tax and £1600 0r £1200 post tax). ???

Pugsley_2

Well, it's tax-free winnings I think & I've been keeping an eye on the returns. £650 in 4 months, but probably not sustainable & I'm going to chuck it in a savings account in any case.

John_M_Business

My simple formula for offset is just an answer to this question:

Are you able to overpay on your monthly interest?

If the answer is 'yes' then an offset is probably good for you. If the answer is 'no', then don't go there - just choose a standard repayment mortgage.

Of course this is simplistic... but it's a 'first step' to finding out what's right for you.