Offset Mortgages -- the Numbers

Robert_Sterling_3

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

This is in fact simplistic, well meaning and quite wrong.

RIP_N_OFF

The thing I like about offset mortgages is the potential they have to keep life simple, especially for someone like myself who has one for the long term.

OK, so a 2-3 year discount will save you a few quid, but then you have to go through the remortgage process again which can take a couple of months. Never mind all the time spent searching for the best rate, dealing with solicitors, mortgage companies etc.

What price a stress free life?

Don't have to mess around with ISA's and savings accounts either.

My mortgage is around 100K @ baserate+0.74% with an offset savings account.

About 40K credit card money offset (30K @ 0% short term and 10K @2.9% life of balance)

Saving an additional £600+ a month into the offset account as well as additional money for yearly bills etc.

My only financial goal at the moment is to pay the mortgage off ASAP and in this case an offset mortgage floats my boat ;D

But it may not float yours

Robert_Sterling_3

My mortgage is around 100K @ baserate+0.74% with an offset savings account.

About 40K credit card money offset (30K @ 0% short term and 10K @2.9% life of balance)

Saving an additional £600+ a month into the offset account as well as additional money for yearly bills etc.

My only financial goal at the moment is to pay the mortgage off ASAP and in this case an offset mortgage floats my boat ;D

But it may not float yours

I am just letting what you have said sink in.

MarkyMarkD

I think that CCkid's numbers make the offset stack up, but (s)he is one of the small minority for whom this is true.

normski_2

As we have have an offset mortgage I often have a quick check of the offset chat forum to see what people are saying.

The formula's and calculations are great but as so many other people have commented there are many other factors.

So to complicate things further:

With Inteligent Finance (IF) you have the option of Cash ISAs. Me and my wife don't have a spare £6K per year to pay into an ISA but by using the offset mortgage we can each move £3K per year into our ISAs and start to build up a nice nest egg (which one day will earn interest tax free) without having a negative effect on the amount of interest we pay on the mortgage.

Walletwatch

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

Interesting discussion, and more so for some of us who are mathematically inclined. One aspect which doesn't seem to have come out of the discussion till this stage is the fact that the same equation above applies to Banks as well. Assuming all the above are rates offered by the same Bank, this actually reduces to a zero sum game, where a case where an Offset mortgage is better for a customer, it is the worse option to the Bank, so far as revenues from that relationship are concerned.

As offset mortgages are more or less derivative products of a combination of a mortgage and a savings account, I feel the above equation would in some way, feature when Banks try to price their offset mortgage loans. For such pricing, they would need to assume some figure for X, as these prices are published ones, and not determined OTC.

If the above is correct, wonder what the Banking industry assumes X to be?

MarkyMarkD

I don't think that banks think of it that way.

As far as they are concerned, an incremental customer with an offset mortgage is an incremental customer, paying an over-the-odds interest rates for the benefits of flexibility etc. Much of the benefit to the customer (if not all of it) is funded by the Inland Revenue, not the bank.

The only marginal cost over and above a normal mortgage is the cost of running the associated current account (if it has that feature) and savings account.

Both of these costs are small compared to making an extra 0.75% or 1% or whatever on the outstanding balance.

If a bank does not offer an offset product to a customer who wants one, it's likely the customer will go elsewhere, not that they will buy a non-offset product from the same bank.

Just my opinion.

Walletwatch

I don't think that banks think of it that way.

As far as they are concerned, an incremental customer with an offset mortgage is an incremental customer, paying an over-the-odds interest rates for the benefits of flexibility etc.  Much of the benefit to the customer (if not all of it) is funded by the Inland Revenue, not the bank.

The only marginal cost over and above a normal mortgage is the cost of running the associated current account (if it has that feature) and savings account.

Both of these costs are small compared to making an extra 0.75% or 1% or whatever on the outstanding balance.

If a bank does not offer an offset product to a customer who wants one, it's likely the customer will go elsewhere, not that they will buy a non-offset product from the same bank.

Just my opinion.  :)

Mark,

I agree with your views (mainly the fact that it is the Inland Revenue that takes most of the hit on an offset mortgage) In fact, it is definitely a zero sum game from that point of view as well, as even at the break-even point, when it doesn't make any difference either to the customer or the Bank between an offset mortgage and a combination of a mortgage and a savings account, the Inland revenue still stands to lose if the customer were to opt for an offset mortgage.

I also agree - an incremental customer relationship is what one would look at primarily, and not the odd 25 basis points that it might be worse off in one scenario as against the other. What would matter is having the product (offset mortgages) as part of your product suite, else you risk losing out on a customer looking for that specific product.

But I do think that this equation is used in some way to price offset mortgages, there has to be a scientific basis to determine the price differential between offset and non-offset mortgages (apart from the fact that you have to be reasonably close to what the market quotes, else you'd be outpriced anyway)

Rik_S

I have read this thread with great interest as i`m considering an offset mortgage when my current deal ends in late Feb.  I`m attracted to the offset for a number of reasons, non moreso than my underperforming endowment -  it will allow me to overpay & I pay a high tax rate.

I`ve tried to use the formula with no success ( ran out of fingers, thumbs & toes )

I would like your opinions as to if I`m going down the right route or not.


£72,000 15 yr mortgage required & I have £38,000 in savings.  


I`ve looked at several lenders although for me First Direct might be the better option as i`m already a customer, the fees are generally lower & the rate is competitive.

My reservations are that my £38,000 is scattered everywhere (isa`s & bonds) and I would have to consolidate those into another account.  I`m also being charged by my current lender for leaving them (bit like a divorce ) despite my current deal expiring.

If someone would care to put some advice my way I really would appreciate it    

Further to the above about £20,000 is in isa`s & £8,000 is a bond that I can`t get acces to for another 6 months ::)

david78

On the face of it your high savings to loan ration (>0.5) means that you should do very well out of an offset mortgage.

However, you need to be careful. You will lose your ISA savings if you move them out of the ISA wrapper. As far as I know the only way around this is to go for an Intelligent Finance (IF) offset mortgage which let you put your ISA savings in a cash ISA which is offset against your loan.

You can also have other savings accounts offset.

I wouldn't let the 6 months delay on getting access to youe bond worry you. Just move the cash into your offset savings account when your bond matures.

One more thing. If at some time you spend your savings so they drop below "one-third" (approximately) of your mortgage debt, you should consider remortgaging then because the offset account may no longer be best.