Offset or Savings?

adele9365

Hi all,

I'm hoping someone a bit cleverer with maths will be able to work out for me which is the better option between these two mortgages. If it matters we are re-mortgaging having been in our house 2 years.

We want to fix for five years and can get exactly the same rate (3.45%) on either an offset or a standard mortgage.

Our mortgage balance would be £88,550 and in savings/offset we would have £25,000.

The offset has fees of £999 whereas the standard mortgage is £99.

My question really is whether it is worth paying the fees for the offset given the savings we have to put it into it.

Thanks

x

Thrugelmir

Another alternative is to borrow less. Then rebuild your savings from having a lower monthly outgoing.

If you wish to retain access to the savings for the full 5 years. Then the offset is the way to go.

dimbo61

I considered using" whatsthecost " and putting all the figures in BUT you need to take into account the savings rates you might get from putting the £25,000 into cash ISA,s
You might get a better rate if you use the £25,000 to provide a bigger deposit !

Having said all that I LOVE OFFSET MORTGAGES having had one for last 10 years.
I like having savings I can get at when needed
I like checking my mortgage account and seeing how much we are saving each day by offsetting ! Sad but true ;-)
We have cash in the bank if we need to replace the Car or boiler,
We can save every spare penny in the offset account while paying off the mortgage quicker.

System

Offset all the way.

Best thing I ever did taking out an offset mortgage:)

getmore4less

I have a post on the offset thread that does the basic calculation for comparing offset against the regular mortgage with savings rates.

This won't quite work because you are effectively borrowing a different amount because of the fees.

As the rates are same the borrow less will always be cheaper but if you want to work out the cost of the keep the savings it starts at £900 and slowly goes down as the offset rate is better that the savings.

Offset is borrowing less on a temp/flexible basis for the cost of £900, you don't save money offsetting unless it is money you need at some point so can't use it to lower borrowing.

Where they really work is when you can borrow cheaper than the mortgage rate and offset that, stoozing.

hugo15

I'm another offset fan. Gave me a saving goal and was great to see the amount of interest I had saved. I also used a zero % purchase credit card to effectively borrow money at 0% and use it to save mortgage interest. I then aid the card off at the end of the 0% period and started again. Need to be very disciplined though and not spend on the credit card for stuff you don't really need.

adele9365

Thanks for the replies.

I do like having the money there if I need it (and when I say need it, I mean absolute last resort!) and the rate wouldn't be any lower with a higher deposit. We are at 65% LTV.

Wouldn't having 25k in the offset be as good as paying it off the mortgage as we aren't paying interest on it?

As for the fees we would pay those upfront rather than add to the mortgage.

A mortgage advisor we spoke to reckons we would be saving approx £826 a year by using the offset. I'm not sure how he arrives at this figure (again, I'm not the best at maths) but if it's right then over 5 years we will have saved 4k+ on interest which is well worth the initial fees.

x

dimbo61

Offset mortgages work in two ways Either
1 Reduce the term by paying the mortgage off quicker because of the offsetting
2 Reduce the mortgage payment every year because of the offsetting.
Say you borrow £90,000 and have £30,000 in the offset account.
The lender will ignore the savings when working out the mortgage payment each month so say you pay £600 a month made up of £300 Interest and £300 repayment.
Because of the money in the offset £100 a month goes towards the repayment part and not the Interest.
You have overpaid by £1200 in the first year and owe less.
If you request that the mortgage payments remain static for the five years you will pay a large part off the mortgage in a short time.
Compound Interest working for you.

getmore4less

adele9365 wrote: »

Thanks for the replies.

I do like having the money there if I need it (and when I say need it, I mean absolute last resort!) and the rate wouldn't be any lower with a higher deposit. We are at 65% LTV.

Wouldn't having 25k in the offset be as good as paying it off the mortgage as we aren't paying interest on it?

As for the fees we would pay those upfront rather than add to the mortgage.

A mortgage advisor we spoke to reckons we would be saving approx £826 a year by using the offset. I'm not sure how he arrives at this figure (again, I'm not the best at maths) but if it's right then over 5 years we will have saved 4k+ on interest which is well worth the initial fees.

x

Paying fees upfront is irelevent it makes no difference.

No way you could be saving £826py over a regular mortgage.

All the offset does is lower your borrowing, but you are down £900 to start with.

£25k @ 3.45% is £862py but you could get interest even at 1% net that's £250 off that £862, if it was just a smaller mortgage it would be less.

We have an offset but don't get one based on false information.

MaxTheCat

I'd offset. What I liked about offset as opposed to savings is that you are effectively getting additional tax free savings at a higher interest rate than you would in an ISA.

getmore4less

MaxTheCat wrote: »

I'd offset. What I liked about offset as opposed to savings is that you are effectively getting additional tax free savings at a higher interest rate than you would in an ISA.

What you are doing when you offset is borrowing less and not paying interest on a larger debt.

There is no magic tax free savings rate that is higher than an ISA.