Using offset mortgage with large lump sum

Pat38493

Hi - my partner recently received a large lump sum on retirement from NHS of about £100K.

She is not sure what to do with it and probably will use some of it to draw out gradually to bridge the gap to state pension age (she retired at 56).

She has vaguely commented about possibly buying a buy to let property, and we are aware of the obvious options like investing in ISAs etc for the part that she doesn't want to access in the next few years, so these are all active options.

As it happens, our mortgage deal ends in the next few months so we need to renew the deal.  One option I hadn't really considered or thought of before is to switch to an offset mortgage and the £100K would presumably avoid a whole lot of interest during the next 10 years or so.  Our outstanding mortgage right now is about £220K (200K main mortgage and an further loan of about 20K). 

I haven't seen any other posts about it on here so I was wondering if you think this is an idea worth exploring?

I'm guessing you are going to say it depends what the interest rate on the offset mortgage is versus the best rate we can get on a bog standard mortgage but let's see.....

zagubov

Any more info?
Is this your forever home or are you thinking of eventually selling up and moving somewhere more reasonably-priced later?
Are you living in an area where house prices are rising fast or slowly?
Are there any other debts with high interest rates?

Pat38493

zagubov said:

Any more info?
Is this your forever home or are you thinking of eventually selling up and moving somewhere more reasonably-priced later?
Are you living in an area where house prices are rising fast or slowly?
Are there any other debts with high interest rates?

We are thinking of downsizing in about 3-5 years from now.

We live near Warrington in WA4 post code - to be honest I have no idea on the house price change rates there.

We don’t have any other debts to pay off - this would obviously have been the first choice.

kidmugsy

I've always liked the idea of an offset mortgage because it preserves the "optionality" of the capital.  For instance you could withdraw some to spend, some to invest in ISAs every year, or whatever else takes your fancy e.g. contributions to a SIPP.

In a way it's like a tax-shelter for the capital with the untaxed return being the reduction in monthly repayments.  It lets you fill other tax shelters at whatever pace suits you.  Who knows, in a year or two's time it might look irresistible to take £40k out to fill a Stocks and Shares ISA each?

Flugelhorn

I know some people don't like offsets but I thought it was great, I was salaried but also had a significant self employed income  and used to put all of it into the offset account and it sat there until the income tax was sorted in the following financial year - eventually the amount equalled to mortgage so all the monthly payments went towards the principal but still had the capacity to get the capital out of we needed it

Pat38493

Flugelhorn said:

I know some people don't like offsets but I thought it was great, I was salaried but also had a significant self employed income  and used to put all of it into the offset account and it sat there until the income tax was sorted in the following financial year - eventually the amount equalled to mortgage so all the monthly payments went towards the principal but still had the capacity to get the capital out of we needed it

Well yes and with current volatility, increasing interest rates and high inflation, paying off mortgage debt seems to become a more attractive option than a year ago when a financial adviser told me this didn't make sense (presumably because he thought the money would grow faster than the mortgage interest rate at the time).

I looked into this a bit more - the offset mortgage is one option but there are not many providers and the interest rates are 4% or more.  

The other option I realised is that we can simply pay off half of our mortgage with cash, and then re-calculate the payments based on the new balance.  The mortgage payment comes out of my account, so I can simply transfer to my wife the difference between  the new lower payments, and what the payments would have been if we had re-mortgaged the full debt.

This monthly amount corresponds to nearly as much the amount that she would have had if she divided the entire lump sum at flat rate by the number of months until SP kicks in.

This way I can get a lower interest rate on the mortgage debt and still have the option to get some out later if needed (albeit with more hassle).  We would then downsize in a few years and as part of that we would re-extract any cash from the equity difference.

In the meantime we get a guaranteed 3.5% or more "return" on that money in a time of high volatility and increasing interest rates, which to I personally expect to continue until at least the back end of next year (although of course nobody knows for sure).

 If things are still looking pretty volatile in a couple of years later, I might even consider taking a portion of my tax free cash to completely clear the mortgage - this probably wouldn't have been a good option a year ago but it might look more attractive in a couple of years from now.

OldBeanz

I had an offset from 2008 to 2020. The interest rate for most of that time was less than 1% and had 3 accounts with the same bank paying 3% on £20k so they were paying me to borrow their money with the final £40k de-risked into Premium Bonds in the final couple of years. I used to enjoy winding up the mortgage free wannabes.
With no medium term resolution of the Ukraine issue and subsequent fuel and food price inflation, I would be paying off any mortgage.

MallyGirl

I had an offset from 1995 to 2021. In the early days the rate was more competitive and people like Egg would give fee free 0% balance transfers so there was interest to be saved for little effort. Gradually it became a legacy product and the rate wasn't so good - I finally managed to get OH to let go of the flexibility and move to a 5 year fixed last year. It has taken some adjusting as we never needed to have savings as we could just buy what we needed when we needed it. It has allowed me to play catch-up in the pension after having my light bulb moment about funding early retirement.

SarahB16

I too ‘had’ an offset mortgage from 2000 to 2016.  I say ‘had’ as I still have the offset account despite having paid off my mortgage as it provides me with easy access to an overdraft/loan facility should I ever need it.  I also took out the mortgage for a 38 year term (that’s not a typo yes thirty eight years) the maximum I could but with the intention of paying off the mortgage as soon as I could. 

I think for couples buying a house together with two incomes they have more financial security as if one person is made redundant there is always the other person’s salary.  I purchased my house on my own and 'overpaid' (that's not exactly how it works with an offset account) on my mortgage most months, hence why my mortgage was paid off in 16 years rather than the traditional 25 years.  In 2008 a redundancy payment was paid into the account and I was fortunate to get another job very quickly however having this offset account provided me with easy access to my money should I need it and meant I didn’t need to worry too much about my financial situation. 

I know when looking back I will have paid slightly more mortgage interest compared to paying 16 years on a fixed rate but given my time again I wouldn’t change a thing. 

I agree with @MallyGirl if I needed to take out another mortgage, as I'm older and more financially secure, I would go for a 5 year fixed rate deal but at that time in my life in the year 2000 it was perfect for me.