Offset Mortgages -- the Numbers

MartinPaul

originalmiscellany wrote: »

MartinPaul - Things to consider - Lots of offset mortgages rely on you having a decent LTV, which it sounds like you might not have if you've only paid off 6k so far. If you have spare money then it could be good in terms of eating your mortgage regularly.

If it's a big amount you owe, the cost (if it's a few percent) could make it completely unworkable;

Thanks, I would guesstimate that the current value of my house is somewhere between £290,000 - £315,000

johndjs

Tax advantages
Within the UK offset mortgages are often marketed as offering "tax efficient" savings. Interest generated within deposit accounts for UK residents is deemed income and is taxed at source (the rate has been 20% since 1983). Within an offset mortgage arrangement the notional 'credit' balance does not generate income but instead saves an amount of mortgage interest that would otherwise be charged. As no interest payment is made there is no tax charge. This is equivalent to being paid the interest on the credit balance tax-free

property.advert

The often forgotten fact is that the offset only works in your favour to the tune of the amount you have on deposit.

Say you have a £100,000 mortgage, interest rates are 5%, so you pay £5,000 a year in interest.

Go to offset, where you have an average balance of £2,500. You therefore pay interest of 5% on £97,500 or £4,875, saving you £125 in interest.

However, you can usually get a better rate on a non offset rate and you may be able to borrow at 4% which would cost you £4,000 a year, saving you £875 more than the offset deal.

The savings and benefits (or indeed costs) vary according to the size of mortgage relative to your average credit balance and the interest rate difference between offset and other available rates.

Best to plot it all in Excel to get a true picture.

getmore4less

property.advert wrote: »

The often forgotten fact is that the offset only works in your favour to the tune of the amount you have on deposit.

Say you have a £100,000 mortgage, interest rates are 5%, so you pay £5,000 a year in interest.

Go to offset, where you have an average balance of £2,500. You therefore pay interest of 5% on £97,500 or £4,875, saving you £125 in interest.

However, you can usually get a better rate on a non offset rate and you may be able to borrow at 4% which would cost you £4,000 a year, saving you £875 more than the offset deal.

The savings and benefits (or indeed costs) vary according to the size of mortgage relative to your average credit balance and the interest rate difference between offset and other available rates.

Best to plot it all in Excel to get a true picture.

The rate differentials are often much smaller and have been zero for some lenders.

FD current differential is 0.3%

the equation starts as
M : mortgage debt
S : standard rate
O : offset rate

C : savings capital
N : net savings rate

(M*S) - (C*N) == (M-C)*O

which simplified is

C(O-N) == M(O-S)
which become a simple ratio check of the mortgage saving againt the rate diferential

C/M == (O-S)/(O-N)

so for a FD offst 2.79% against equivient tracker 2.49%

a saving rate of say 2.8%(tesco) taxed at 20 % so 2.24%

C/M '= 0.3/0.55 = 0.55

So you need 55% in offset savings to break even.

To be fare FD do have an offset with a lower interest rate with higher fees but that needs a different calculation as well as the one above.

andrewd41

Hello all, new to the boards today.

Reading the posts with interest, I have a quick question.

We are fully offset on our mortgage of around £43,000. Paying off £450 p/m we are collecting the cash every month and putting into a savings account. We have saved approx £6K in interest since we have become fully offset, there is no way we would have received that amount in interest on savings - so for that we are happy.

Rambling over - We are now considering paying off the balance.

Is this sensible ? we do have an emergency fund of 8-12 months cash. I just have a nagging doubt of losing the majority of my savings this way - and whilst we aren't paying any interest is there any point ?

Any opinions welcome.

HappyMJ

andrewd41 wrote: »

Hello all, new to the boards today.

Reading the posts with interest, I have a quick question.

We are fully offset on our mortgage of around £43,000. Paying off £450 p/m we are collecting the cash every month and putting into a savings account. We have saved approx £6K in interest since we have become fully offset, there is no way we would have received that amount in interest on savings - so for that we are happy.

Rambling over - We are now considering paying off the balance.

Is this sensible ? we do have an emergency fund of 8-12 months cash. I just have a nagging doubt of losing the majority of my savings this way - and whilst we aren't paying any interest is there any point ?

Any opinions welcome.

Nope I'd just leave it. It makes no difference if you pay it off or not and it is a cheap source of funding if it is ever needed.

Loughtonlad

Outstanding mortage 110 - house value 175500
20 year deal with Yorkshire bs. is 3.04 fixed for three years then SVR or 3.24 offset for three years then SVR both have same charges i.e £495 with free legal and val.
We have 10k in in the saving and save about 1100 or so every month after all the bills..

also have ISA with M&S at 3%. I wonder what would work out bettet. offset or fixed?

Rasmussener

I'm not sure it necessarily follows. Presumably, the prices for both types of mortgagesare increasing. The difference can be reduced, in fact. I think the difference has declined sharply in recent years. I think lenders want to make them more competitive,because if you do, in fact, they get in your savings account and a mortgage.

Perelandra

getmore4less wrote: »

Yes you can,

Exercise for the mortgage adviser to find the lender that provides this facility.


Barclays/Woolwich used to do this but stopped it a few years ago.

edit to add the answer :

YBS offset plus
http://www.ybs.co.uk/mortgages/types/offset/offset_plus/offsetplus_b.html
http://www.ybs.co.uk/mortgages/types/offset/offset_plus/offsetplus_s.html

What an intriguing idea. I'd never heard of these! Now all I need to do is to find some wealthy friends or family... hee hee

Royal29

Hi

First time Ive used this site. Very interesting.
Ive got a question hope somebody could please help.
Im a deputy for my great aunt, who I drop money of for each week. Ive got a bank account in my name which her money goes into.
Now im not sure if this is legal or not but could I use what ever money is in that account to offset my mortgage.
The bank said cant see why not, and DWP said its a personal thing, but im still not convinced.

Thanks

any advice welcome