Fully Offset Mortgage: Practicalities

Tomatillo

We have found ourselves in the position where we’ll be able to pay off the mortgage by the end of our current fixed rate in a few months time (unexpected inheritance). Instead of fully paying it off we’re thinking of getting an offset mortgage and fully offsetting the mortgage from the start. The reason for doing this is mainly because we have children in independent school and the exam years are looming. The offset amount would be our emergency buffer and would be enough to see each of them till the end of exams if anything untoward happened to our jobs (though the plan would be that we wouldn’t need it). Once they’re though in a few years we’d review but probably just pay it off. 

I’ve never had an offset before and I’m trying to think through whether there are any disadvantages to this plan as compared to just paying it off. I am hoping I can set it so that any capital payments come from the linked savings account so essentially we can ignore them in our cash flow. Is that right? Is there anything else I should think of? 

Thanks v much. 

getmore4less

It can work but you have to factor in the costs for the convenience for a line of credit against the other options.

You may be better boosting pensions, retaining some savings and having a regular very low cost loan.

if you have a time line you can get fixed rate savings that give more than the mortgage.

Will the schools offer a discount of early payment?

Although the interest may be £0 if you do draw it can be more expensive.

FD offset rate carry a 2%+ premium over the best available.
Barclays a smaller margin but high product fees
etc.


We have an offset but the days when they were a no brainers as they were cheap and there was free money on Credit cards have long gone.

Tomatillo

Thanks very much for the reply. On the practicalities, can you just set it so any capital payment comes out of the linked savings account so that you can essentially ignore it and the offset balance stays at 0?

 

I have looked at the Coventry BS offsets and the deals currently available would let us have an offset with a fix at 1.39% for 2 years or 1.49% for 5, both no fee (our LTV would be less than 25%). So not the cheapest fix on the market but not hideous if we did decide to drawdown. I vaguely remember reading something negative on here about Coventry offsets but I can’t now find it. On the face of it it looks like quite a good option. 

On alternatives, sadly no discount on early payment for the fees. For various personal reasons we're feeling a little risk averse with this money. Given the current high inflation/possible rising interest rates/expensive looking markets we’re looking to use this to give us security for the expensive and important school years plus more flexibility on our cashflow. We did up our S&S ISA/pension contributions when we got the money and we might up them again by the amount we currently pay on the mortgage but we’re going to use the capital for security at the moment. So for us it’s a question of pay off the mortgage or use the offset given our current position.  

 

Thanks very much. 

getmore4less

one of the best hedges against inflationary times has been the stock market.
if a 40%+ tax payer maxing out that portion of income into pension is probably the best use of the cash. 

The debt currently very cheap gets inflated away for a very low overall cost.

Depends on lender if you can offset an account you can use for the payment

Tomatillo

Yes I appreciate that but we have very specific personal reasons for putting a high value on financial security over the next few years. We're happy with our current pension contributions (taking into account projected value against LTA etc) and don't want to lock this money up where we won't be able to reach it for 15 years right now. In any case we currently make use of a good chunk of our annual allowance so it would take us a while to get it into pensions even if we wanted to.

What I'm trying to decide is pay off mortgage vs offset and whether there's any reason not to do the latter. 

Thanks very much

Brie

So you have a mortgage of say £100k and need to remortgage.  And you have an inheritance of say £100k.

So you want to get an offset mortgage for £100k and put the £100k inheritance in with it so will not be paying any interest at all?

Given the predictions that mortgage rates may begin to climb I would be going for the 5 year fix.  After that time you may find your circumstances much different - kids older, your wages much higher, whatever - and maybe do a new fix or do without the mortgage at all.

fyi - in my experience one of the issues with an offset is that the money is easily available.  Sooooo easy to spend.

Tomatillo

Yes exactly Brie (slightly different numbers but essentially that). Assuming all goes well then we'd be able to ignore the mortgage because there'd be no interest and any capital payment would just reduce the amount in the savings account by the same amount as the mortgage. If we did find ourselves needing the money (e.g. health/job problems) then we'd essentially have a cheap line of credit open and we could keep paying school fees till the next sensible exit point. At the end of 5 years the youngest should be nearly the whole way through so we could close the mortgage then and re-evaluate life plans/ 

Merlin139

Had a an Offset Mortgage for 4 years between 98 and 2002. In that time we brought 2 new cars and 2 new motorbikes.

Long and the short after 4 years of paying off our mortgage we increased it by nearly 15K

We said never again but then 9 months ago we did exactly what you are thinking of doing with your mortgage. Had the total amount to clear it so have offset the total amount and pay no interest on it. The amount we would have paid each month is equal to the amount my wife pays into her share saving scheme with her employer.

20 years older and wiser now!

Took a fixed rate over 3 years and it will clear at the 3 year point. No danger of having to raid the money in the offset now as we have emergency funds and our New car and Bike days are over.

All though I did just upgrade my motorbike 6 weeks ago by selling my car and taking some of the equity out of it to fund the bike purchase and also have a newer car but with less gadgets.

Tomatillo

Thanks v much Merlin and hope you're enjoying the bike! 

Would you mind me asking who your provider is and how it works in practice (can you just set it up and foget it)? 

Merlin139

Tomatillo said:

Thanks v much Merlin and hope you're enjoying the bike! 

Would you mind me asking who your provider is and how it works in practice (can you just set it up and foget it)? 

Yes loving the new bike. Kawasaki GTR 1400

Yorkshire Building Society now. Virgin One account 98 to 02

I have 2 accounts. A Mortgage account and a Savings account.

Normally with an offset account depending on the lender you may have a selection of accounts that are used to offset all or part of your mortgage balance. Each month a payment would be taken from your main or currant account to reduce your mortgage balance. 

For me when my mortgage moved to offset some confusion was caused because I had cancelled my direct debit so no money was taken to reduce my mortgage, even though I had the full balance in my savings account to offset the balance.

Sorted after 2 months when I noticed nothing had happened. What happens now is that they take the mortgage payment from the savings account so that reduces and it also reduces the outstanding mortgage balance. Made a complaint to make sure they changed the way they did things so this would not happen again. They gave me some compensation which I did not want so I gave it to RNLI. 

The problem for me was that YBS did not tell me I had to ask for the payment to be taken from the savings and they did not contact me to ask why I had cancelled my DD. Obvious to me as the money was in the savings account. Very few people will run an offset mortgage as I am or you are thinking of doing so. Providers don't ask the right questions.
Even after I had said to everyone I had spoken to when choosing the product, setting it up and moving the money to the savings account. I would totally offset the Mortgage. 

Yes you can forget about it. I get a statement each month to show my mortgage balance is reducing and I log on each month just to see that my offset savings balance is reducing. My savings account has £1 more than the outstanding mortgage balance.

Hope that is not too confusing.

Tomatillo

Great, thanks very much. That sounds perfect for us for the next few years.