Offset Mortgages -- the Numbers

zarjaz_2

I'm looking for a bit of advice on my Santander offset. I have had it a few years, and pay 0.5% above base rate - so 1%.

It comes with a "credit line", which would let me take around £40k out, and I'd just pay more in monthly capital & interest.

I pay tax at 40%. So, here's the (perhaps dumb) question. If I can get 3% in a savings account (such as Nationwide's current offering), wouldn't I be better withdrawing the £40k from my offset, and sticking it in the savings account? I'm not good with the numbers, but with my calculator it seems I'd earn £1200 in interest - 40% tax, so £720 in the saving account, but pay just £400 in interest to Santander - a gain of £320 for doing very little. Is this right? Have I missed something obvious?!

Gary

pardal51

LongTermLurker wrote: »

I think the lifetime tracker at over 2% above base rate could prove quite expensive in a few years when rates rise. I like the look of the 2 year tracker and am going for one myself. Not sure I'd track at that rate for lifetime though.

I believe a closing fee of £149 for porting your offset mortgage; therefore 'not much risk' in life tracker

LongTermLurker

pardal51 wrote: »

I believe a closing fee of £149 for porting your offset mortgage; therefore 'not much risk' in life tracker

That's right, it is a flat fee to get out, but the lifetime interest rate is higher than the 2 year tracker so if you're likely to pull out and pay the £149 you might as well have gone for the shorter term.

Although it's not a lock in, I still don't think I'd go for a long term tracker at +2% though and even in the short term it's unappealing.

pardal51

Very good spreadsheet to make your calcs....

https://forums.moneysavingexpert.com/discussion/1157173

getmore4less

zarjaz wrote: »

I'm looking for a bit of advice on my Santander offset. I have had it a few years, and pay 0.5% above base rate - so 1%.

It comes with a "credit line", which would let me take around £40k out, and I'd just pay more in monthly capital & interest.

I pay tax at 40%. So, here's the (perhaps dumb) question. If I can get 3% in a savings account (such as Nationwide's current offering), wouldn't I be better withdrawing the £40k from my offset, and sticking it in the savings account? I'm not good with the numbers, but with my calculator it seems I'd earn £1200 in interest - 40% tax, so £720 in the saving account, but pay just £400 in interest to Santander - a gain of £320 for doing very little. Is this right? Have I missed something obvious?!

Gary

Have you filled your ISAs, save a bit of tax.

Also look at a series of monthly savers a bit more work but higher rates.

What any fixed term savings accounts if rates rise you could lose out.

jamesd

zarjaz, your calculation is fine, a gain of 0.8% after higher rate tax.

Worth a look at the best bank and savings accounts because you can get an 8% regular saver account form First Direct, 5% gross from an A&L current account for a year on £2500 and 4% gross from Lloyds for between £5000 and 7000. Some account have minimum funding requirements each month but those are easy to meet with a standing order going in each direction or rotating through the accounts.

3% gets you 0.8% after tax and mortgage interest
4% gets you 1.4%
5% gets you 2.0%
8% gets you 3.8%

So you can usefully take the money out, open a few current accounts (£9,500 worth between A&L and Lloyds) plus some savings accounts with enough so you can put the maximum monthly amount into the regular saver accounts for a yea, drawing the money from the savings accounts.

You should be able to make £500 to £600 a year without any risk.

If you have a spouse who is a basic rate tax payer or who doesn't pay tax you could make more using accounts in their name. If you have non-mortgage debts it might be a better idea to pay those off instead of using savings accounts.

Santander might be surprised and contact you to check that all is well, since they have obligations to check such things these days. Just let them know what's up and it'll be fine.

faagble

Diggingout, excellent stuff thanks.

ffnameary

There you go being polite again.

originalmiscellany

que?! I don;t understand your post.

Spiggle

Hi,

Please would someone just confirm that I've got my conclusions correct i.e don't offset.

I have:
Mortgage 1 = £42,367 @ 0.19% above BoE life tracker currently 0.69% with 10 years left
Mortgage 2 = £6,138 @ 0.99% above BoE life tacker currently 1.49% 10 years left (approx)
Both on repayment. I have been overpaying but now looking to save to offset against or pay as lumps sum once a year using two of the FD reg saver accounts @ 8%.

I just looked at the FD Offset Mortgages (and I know very little about these products) and did some of their calculations. Based on the 2.29% above BoE for term. Because the monthly payments are interest only it would mean a huge reduction in the monthly required payment i.e. illustrative £115 per month which would 'free' up some £300 per month of 'required' payments which could be saved either in the offset product or in a higher interest paying account/reg saver.

I'm usually reasonably good with excel and calculators but obviously not as good as I thought! My head tells me that an offset would be more expensive in the long term because:

The mortgage int rate is higher to start
Therefore the interest paid over term is higher
Capital does not reduce

However, if I am earning considerably higher rates of interest on the cash savings is it a better use of my money? Isn't my money earning more than it's costing me?

Then logic says that can't be right because I know that at the moment I'm paying roughly £39 in interest per month which is considerably lower than £115.

Please help! Can you confirm that I shouldn't go with an offset? can you confirm that my thinking is right (even if I've failed with the calculators!:o).

Thanks in advance,
Spigs