What are the downsides of an offset mortgage?

scoobydoo789

So we have ended up in the fortunate position of having the option to pay off our mortgage, but before we do so are considering an offset mortgage. There are a few reasons:

1. Completely paying it off would leave us with no savings, so some mortgage would be needed anyway as a safety buffer.

2. We have no other debt, but like the idea of a credit line in case of an emergency. Mortgage rates seem like cheap credit (if paid off fast), and access to the money would be in place instantly.

3. We won't inherit anything so we need to bear that in mind. One of us doesn't have any pension yet so we need to sort that out as we're almost 40. Diverting money into pension rather than mortgage seems like a sensible thing to do.

On the surface, an offset mortgage feels like a 6 figure credit line at whatever rate I negotiate, and frankly that's got to be cheaper than a private loan (as long as paid off quickly). I have no intention of using the mortgage to buy anything really and granted, I won't make anything on the cash that's sitting there - but I wouldn't make anything on it if I paid it off either - so its not like I'm any worse off?

So what am I missing? Why not take an offset and have a big line of credit if I ever wanted it?

Thoughts appreciated!

Glover1862

You'll pay s little more for the offset, I am doing something similar , my offset is 0.2% more, I think it is worth the extra.

Ive gone for a variable offset for the term, 20 years in my case. I hope to to be fully offset in about 5 years, after that I pay no interest so not really concerned what interest rates do, if they start to go up now it will only be on the difference between mortgage and saving. Eventually I hope to have both the Savings and mortgage paid, easy to credit for the term, no messing about changing mortgage and product fees,so yes I think not many downsides, better than overpaying in my opinion.

scoobydoo789

Thanks - that's helpful. Lets say the mortgage balance is 100k, and I have 100k cash already, then I don't really need to care about the interest rate right (unless I spend some of the 100k at which point I'm paying interest on it)? And if I were to lock the rate for a period - then ultimately if something comes along that earns me more than the interest rate on my cash, then there's nothing to stop me moving the cash into that right?

Thrugelmir

Why would you need to have access to a £100k of cash?

There's no disadvantages to having an offset mortgage. Other than has been previously mentioned in that you'll pay for the facility in terms of a higher interest rate.

The product works for those that need require it. As interest rates rise again their appeal will grow again.

Glover1862

scoobydoo789 wrote: »

Thanks - that's helpful. Lets say the mortgage balance is 100k, and I have 100k cash already, then I don't really need to care about the interest rate right (unless I spend some of the 100k at which point I'm paying interest on it)? And if I were to lock the rate for a period - then ultimately if something comes along that earns me more than the interest rate on my cash, then there's nothing to stop me moving the cash into that right?

Yes, basically correct as far as I know. Only reason I didn't go for a fixed rate offset is they generally come with a early repayment charge within the fixed period, if you are fully offset then makes no difference where rates go, if you decide to move or want to raise funds then makes sense to have no erc. Also, offsets have quite high product fees, mine will be a £999 but it's for the term, paying that every 2 or 5 years hurts especially as you will never make the fees back as you pay no or very little interest.

scoobydoo789

Sounds like its a no-brainer then; a simple way to have liquidity of cash for the future, but also reduce the mortgage cost. Thanks for the info, glad I asked!

dimbo61

Do you have a mortgage at the moment ?
Costs of setting up any mortgage can be hundreds if not thousands of pounds.
You will pay a slightly higher rate of interest.

getmore4less

offset have/had a place.

The days when rate margins were low fees were low and the tracker rates were base +<1% and STOOZING(free money) was easy they were a no brainer.

These days you can structure lower mortgage rates than savings to keep the flexibility at lower cost.

Although the interest rate my not matter until you use the line of credit setup costs will.

Thrugelmir

scoobydoo789 wrote: »

On the surface, an offset mortgage feels like a 6 figure credit line at whatever rate I negotiate

Miss this earlier. There's negotiation you apply , the lender offers.

If you intend fully offsetting. You need to remember that you'll be still required to make the full monthly mortgage repayment every month. As a consequence you'll need to reduce the offset account balance to keep it in line with the mortgage balance. As there'll be no benefit on any excess held.

unkle

Thrugelmir wrote: »

Miss this earlier. There's negotiation you apply , the lender offers.

If you intend fully offsetting. You need to remember that you'll be still required to make the full monthly mortgage repayment every month. As a consequence you'll need to reduce the offset account balance to keep it in line with the mortgage balance. As there'll be no benefit on any excess held.

I have an offset with First Direct, the only mortgage payment I have to make is the interest, which when fully offset is zero.

Glover1862

unkle wrote: »

I have an offset with First Direct, the only mortgage payment I have to make is the interest, which when fully offset is zero.

You must be on interest only then?

With a repayment only the interest element is 0 the capital still needs to be repaid. Im ok with that as come full term youll have the offset savings plus the capital will be paid