Remortgage: Offset vs Regular + keep ISA savings

MrCurious

Hi all,

I am about to remortgage my house for the first time and am wondering what is a better option: to keep my £120k tax-free ISA savings and take regular mortgage or move my savings into the offset account and take the offset mortgage.

I am looking for the initial period of 5 years and loan of £282,000. I particularly compare the following options:

Option 1: Regular mortgage + keep ISA

If I go with Metro bank (or HSBC, they have similar offer) and pay 1.89% on £282k for 5 years (+ approx. £999 fees), I'd pay £65k (£1,082 for 60 months - uswitch.com says so) and have balance of approximately £242k (I used themoneycalculator website's mortgage balance calculator and put there £282999, £1082, 1.89%, 60 months).

If I keep £120k in ISA at the same time: ISA's 1.5% interest (one provider offers this rate for 1 years fix acounts) on £120k over 5 years (although interest might be going up...) will give me interest of minimum £9,274.08. Let's say £10k (but it can easily go higher if next year ISAs rates go to 2% or higher...).

After 5 years I can pay into mortgage those £10k so the mortgage balance is: £232k

Option 2: Move ISA savings into offset mortgage

If I go with Scottish Widows and put £120k in offset: I'll pay 2.24% interest and SW calculator says I'd pay 61 monthly payments of £1,133.68 (= £69k) and after 5 years I'll have balance £229k (SW offset calculator says so) which is £3k less than option 1 but I paid £69k - £65k = £4k more. My concern here is also loosing the tax-free status of £120k ISA savings (I am 40% tax payer).

My verdict

After 5 years I paid £1k more from the pocket and ended up with the same amount of the mortgage debt but I lost the tax-free status on £120k.

For that reason I feel that 1.89% mortgage on £282k (with HSBC or Metro) + 1.5% on £120k ISA savings + leaving £120k tax free is better than 2.24% on £162k (£282k - offset of £120k) + moving £120k out of tax-free.

All this applies for the period of 5 years as I will be very likely looking for the cheaper mortgage after that period.

Is this calculation and my reasoning right? Please point out if you see any flaws.

Are there any hidden benefits of offset mortgages? What's the catch?

I believe that claims like "You'll save £111k and shorten the repayment period by 7 years and 3 months" are misleading as this applies ONLY if you stay with the same offset mortgage till the end of the entire mortgage period (not just first 5 years...).

Many thanks!

getmore4less

The base calculation for offset is

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 against the rate differential

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

£120,000/£282,000 == (2.24%-1.89%)/(2.24%-1.5%)

0.426 == 0.473

You need to be 47.3% offset to break even with these rates 42.6% is very close and as this base calc is for interest only, no fees we need to do...

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

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Easier to make the payments the same on the mortgage calculations

after 5 years
regular
£282,999 1.89% £1082pm £242,994
£120,000 1.5% £0pm £129,345

NET £113,649

offset
£162,000 @ 2.24% £1082pm £112,553

The offset sneaks in by around £900 over 5 years
but it only needs a savings rate rise by 0.15% to lose out.


There are offset providers that you can offset your ISA cash in ISA offset account.
eg
https://www.barclays.co.uk/help/savings-and-investments/isas/offset-savings/

My verdict

After 5 years I paid £1k more from the pocket and ended up with the same amount of the mortgage debt but I lost the tax-free status on £120k.

You have rounded quite a few numbers with this sort of difference the odd £100s count if you make the payments the same at the higher amount you end up £1,100 better off with the offset.

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offset
£162,000 @ 2.24% £1134pm £109,254

regular
£282,999 1.89% £1134pm £239,724
NET £110,379

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what's your LTV there may be an option to use some of the cash to get that a bit lower and get better rates.

dimbo61

As getmoreforless has pointed out you can have an offset mortgage with Barclays and offset your ISA,s while still keeping them inside the ISA tax free wrapper.
Not sure on the mortgage rates they have for a 5 year fix on your LTV or the set up costs.
However if you take out a fix at say 2% and ISA,s rates rise above 2% next year you could withdraw your savings from a Barclays offset account and pay into any bank or building society offering a better rate than your mortgage rate.
Very moneysavingexpert

getmore4less

Looks like the OP forgot to mention the £750 fee on the SW flexible mortgage.

also noticed the OP is comparing over different product lengths 60 and 61 months.