Offset Mortgages -- the Numbers

jamesd

How much more per year will the higher interest rate cost you?
What could you get in interest from a cash ISA without offsetting (2.5%+ from FD)?
What is the interest rate you're saving on the Barclays mortgage by offsetting?
How much more is the fee?
If you can't calculate those, write the mortgage interest rates, amount of loan and amount of ISA money and someone else can calculate it.

It doesn't seem likely that you can save more money by offsetting than the higher mortgage interest rate costs you on the presumably larger mortgage amount that you're paying interest on.

You're really doing the cash and S&S ISA in the wrong order. Investment risk falls as the time you're investing for increases, so you're usually better off investing first then using the savings closer to any deadline that you have.

Using the pension lump sum is a good move. That'll get you some useful tax relief on your mortgage repayment that you wouldn't get if you just overpaid. And you'll probably grow your money at a higher rate than the interest rate of the mortgage.

The residential mortgage for BTL plan is fine. Do be sure that you don't deduct the capital repayment part of any mortgage payments from the rental income.

gadgetmind

NOTE: Due to brain fade, I say "Barclays" here rather than "HSBC" - thanks for jamesd for spotting my madness.

jamesd wrote: »

What is the interest rate you're saving on the Barclays mortgage by offsetting?

Barclays are base +1.69% and FD are base +2.09%

How much more is the fee?

Barclays are £999 and FD are £99

If you can't calculate those, write the mortgage interest rates, amount of loan and amount of ISA money and someone else can calculate it.

The calculations aren't a problem (my spreadsheet is getting rather large), just the underlying assumptions.

It doesn't seem likely that you can save more money by offsetting than the higher mortgage interest rate costs you on the presumably larger mortgage amount that you're paying interest on.

If all goes to plan, I'll be offsetting close to £200k by end of 2014, partly from income and partly from savings in multi-year savings accounts. Of course, I could pay lump sums off the Barclays mortgage BUT I'm wanting to buy a Furnished Holiday Let, and we can offset the mortgage interest against income. However, if we pay off and then draw down again, this isn't seen as borrowing against the second property.

You're really doing the cash and S&S ISA in the wrong order.

In what way? I intend to offset with cash, meanwhile use my ISA allowance for S&S ISAs (revenue allow approved options to be moved go an ISA without CGT!), then ideally move the cash into cash ISAs while continuing to offset.

Using the pension lump sum is a good move. That'll get you some useful tax relief on your mortgage repayment that you wouldn't get if you just overpaid. And you'll probably grow your money at a higher rate than the interest rate of the mortgage.

Yup, it should pay off the mortgage and (ideally) release cash in ISAs. If it releases cash not in ISAs, we'll get hit by interest during the decade it takes to trickle it across.

The residential mortgage for BTL plan is fine. Do be sure that you don't deduct the capital repayment part of any mortgage payments from the rental income.

Understood and this is again where Barclays lose out as they won't do interest only.

Assuming the property pans out, we'll go with FD and hope that a better product is around in 2014/2015.

Ian

jamesd

gadgetmind wrote: »

In what way? I intend to offset with cash, meanwhile use my ISA allowance for S&S ISAs (revenue allow approved options to be moved go an ISA without CGT!), then ideally move the cash into cash ISAs while continuing to offset.

Historic return for the UK stock market has been more than 10% plus inflation. You're not going to be paying anything like that in mortgage interest, so you're likely to lose out by the difference between investment gains and mortgage interest rate.

While there aren't any guarantees, once you factor in dividends and general market movement trends, as the time your money has been invested increases, the chance of you ending up below your starting point decreases and the amount you are likely to be at above that increases.

So you get two advantages by using S&S first: longer term compounding of the higher expected gain and lower chance of being in a down part of the cycle when you get nearer to the end of your plans.

Earlier you wrote "The Barclays one does, but the rate is higher and the up-front fees are HUGE" but this time you wrote "Barclays are base +1.69% and FD are base +2.09%". Wondering which way around it is?

gadgetmind

jamesd wrote: »

Earlier you wrote "The Barclays one does, but the rate is higher and the up-front fees are HUGE" but this time you wrote "Barclays are base +1.69% and FD are base +2.09%". Wondering which way around it is?

Oops, yes, you're right. For Barclays read HSBC throughout - I've been talking to all 3 and it's a Friday!

Barclays offset (including ISA) but have high rates. HSBC won't offset, and won't do interest only, but are base+1.69%. FD are in the middle regards rates, will do interest only, will offset, just not ISAs.

Regards S&S ISAs, yes, I've always tended to do those, but got cold feet a while back and did a long term cash ISA at just over 4%. My plan when "unwinding" this mortgage is to move offset to cash ISAs as I'll be nearing the age when I'd be considering retirement.

Of course, if I can do better in cash ISAs than the mortgage interest, then I'd just do these and not bother with the offset. However, I'll be offsetting for 4-5 years as I'll be using my ISA allowances for S&S.

And of course, they'll change the rules so many times before than that all this planning will be moot. :-)

Ian

getmore4less

I think the real key here is the access to cheap funds to invest in another property, Ofsets are ideal for this kind of investment, the ability to move fast when something comes up and be able to transfer fund imediately will give opportunities that having to borrow or realize other invesments won't allow.

FD
charge a 0.2% premium on their offsets +1.89% or +2.09% with £99 fees

I see they have changed the web site to make it harder to find the actual costs.

Barclays
charge a premium of 0.4% for offsets +2.59% or +2.99 £999 fees

Can't see the low rate quoted.

gadgetmind

Yeah, my fault. The base+1.69% was HSBC for a standard non-offset repayment deal with a low (<50% in my case) LTV.

Ian

getmore4less

If I was looking now I think barclays would not be in the running, FD would be my benchmark for any other product ATM.

jamesd

If I recall correctly First Direct currently do a cash ISA at 2.5% so that'll roughly match your mortgage interest rate.

If you got cold feet on the S&S ISA two years ago your timing for not being invested was excellent. Increasing my investing outside an ISA from around March 2009 made me enough to pay the deposit on the place I'm currently in the process of buying with a FD mortgage. No need to touch the ISA money. Now isn't as good as that time but it's still a good time to be starting to invest, assuming only that we continue to see the normal sort of economic cycle that we've seen in the past.

gadgetmind

I'm currently treating ISAs as a one-way-street, which is exactly what I did with my TESSAs and PEPs before them.

Yes, cash ISA was a while back. I might move it to an S&S ISA at some point, but it's got a while to run yet.

Ian

gadgetmind

jamesd wrote: »

If I recall correctly First Direct currently do a cash ISA at 2.5% so that'll roughly match your mortgage interest rate.

As long as ISAs can beat the mortgage interest, then I'll be *very* happy to not bother with offsetting. Currently, with a low LTV, and a long(ish) term ISA, this seems easy. But in future, who knows?

Ian