PB’s or Offset

Inadilemma

Hi there,  after a bit of advice please or a sanity check.    I currently have a mortgage of just under 170k, I recently received some money (50k) and I’m deliberating wether to stick in premium bonds or just keep in bank savings account offsetting the mortgage...both pretty dull options I guess but is offsetting the most sensible approach?

To add some context of overall position, main house is worth 550k plus I have 2 other properties mortgage free (400K) and about 200K across invest funds/savings etc, only debt is the mortgage.  Currently paying 21% into pension and also have 15 years of a final salary pension on top.  I am 47 married with 2 grown up kids. 
 thanks 

Albermarle

I guess it depends on the interest rate on your mortgage.
PB's currently pay around 1.2% on average ( + an infinitesimal chance of winning a Million ) .
Typical high st bank savings account pays close to zero . NS&I income bonds pay 1.16%. Fixed rate/term savings may pay a little more.

DiggerUK

You have savings, pensions, cash in the bank and £170k of debt......what's your question again..._

bowlhead99

When you say 'offsetting' the mortgage do you literally mean you have an offset mortgage product where every pound in the bank account is a pound that will not be charged any interest on your mortgage?   Or do you just mean that you would be earning a derisory interest rate while seeing your balance in your account every day next to the mortgage account balance and having the comfort that you could pay off a chunk of the mortgage if you felt like it? 

If the latter, your return from cash sitting idle in a low interest current or savings account at a bank would be worse than the expected ~1.2% from PBs in a typical year, but if it is a formal offset arrangement then you would save whatever the mortgage interest rate is, though you haven't told us that number.  Obviously it makes a difference whether your mortgage rate is a high 3% a year (try to pay it off quick, or move to a better deal) or a low 0.9% a year (better not to pay it off as you would expect to earn more on the premium bonds and could simply pay it off later if the rates stopped being in your favour).

It's quite nice to have the comfort of cash or premium bonds sitting around because if some emergency comes along or you have some unexpected expenditure (e.g. on your first or second or third properties) you can handle it without needing the rigmarole of a remortgage (which may be difficult if the emergency happens while you have lost a job or something). But if you and spouse have decent income and credit cards etc, and had a bunch of savings before this £50k arrived, then it might make a lot of sense to clear down some mortgage if you already have good retirement / investment provision - and an offset arrangement if you have one with your lender is a great way of 'clearing' the mortgage debt without formally paying it off.  

Sometimes offset mortgages can be more expensive than regular mortgages so it may be worth investigating a change of product if you don't need the flexibility.

A further factor is that perhaps the reason you still owe a couple of hundred grand on your main property while owning two fully-paid other ones, is that you borrowed more money against your main home to help finance one or both of the other properties that you now let out. If so, then you may be claiming some of the mortgage interest as an expense to reduce the taxable profits of your property rental business, and you would lose some of that 'tax shield' effect if you reduced your mortgage interest bill; in such circumstances, generating tax free returns from premium bonds at 1.2% could be preferable to offsetting a 1.2% mortgage.