Offset Mortgage?

Ljc80_2

It was mentioned to me I should look at changing to an offset mortgage as I am accumulating a bit in savings with new job.

I have a 40k mortgage with nationwide at 1.45%

Currently overpaying about £250 on top of the £224 monthly fee.

I have saved £27k in last 2 years, with 15k in an isa and the other 15k to be put in in April.

I was planning on just increasing overpayments once I have got this years isa allowance maxed.

However, I have no knowledge of offset mortgages and wonder if I would benefit?

I would hope to be nearly mortgage free in 3 years anyway, in which time I would pay about £1800 in interest. So any mortgage fee for setting up an offset would almost make it pointless?

da_rule

As you have realised, an offset mortgage is a different product so you would have to remortgage and pay the relevant fees.

An offset mortgage works by offsetting the interest on the mortgage against the savings accounts. So, if you have a mortgage for £40k and £20k in a relevant savings/current account, you'll only pay interest on £20k of the mortgage (£40k-£20k). You are not paid interest on the savings/current account.

If the savings accounts are paying more interest than the mortgage is charging then overpaying and keeping the money in the savings account may be a smarter use of the money.

However, if you are a higher rate tax payer, it may be advantageous to not have to pay the tax on the interest on the savings.

amnblog

An offset is valuable if you want to save mortgage interest whilst keeping control of your cash if you need it later.


Offset rates are higher than standard rates and the maths work better for a higher rate tax payer.


If your intention is to pay off the mortgage as soon as possible and you don't need the capital back, then the offset rate may not be worth paying the extra for.


Get some advice from a broker if you are unsure.

getmore4less

where are you getting 3y £1800 interest from?

if the rate is changing up it will change things

£40k @ 1.45% £224pm 202 months interest in 1st year £566
£40k @ 1.45% £474pm 90 months interest in 1st year £546
£40k @ 1.45% 3 years £1136pm interest 1st year £493 total 3y £900

You can earn £500 tax free if a high rate taxpayer so there is little point in offsetting/overpaying as you can better 1.45% net in savings.


I think you will struggle to find an offset to make it worth bothering on cost, there may be other features of offsets that make them attractive.

Focus on saving investment strategy and see if an offset would fit into that.

SouthLondonUser

As others mentioned, offset rates tend to be higher. In my view, the main advantage of an offset is the flexibility. let's say you have a mortgage of £ 200k and £ 50k in savings. Normally, you'd have to decide how much savings you want to keep available for a rainy day, and how much, if any, to use to repay part of the mortgage. An offset offers the best of both worlds: you pay interest on £ 150k, but, should you need those savings for an emergency, you can still access them, which you cannot do if you use that money to repay part of the mortgage. I find this can be very useful if your job is unstable, at risk, or if your income is very irregular (eg you're self employed) as it gives you a good safety net.

First direct offers good interest-only offset mortgages; the interest-only nature gives even more flexibility because, should you find yourself out of work or should you have unexpected expenses, paying interest only gives you more breathing space. Of course it makes sense if you see this as temporary help only: the debt still needs to be repaid and you must make sure you can repay all the principal.