Offset vs. Overpayment

SeekingLogic

We live in interesting times with "inverted yield curves" and fixed rates now matching base rate. So a question, as we're about to choose a 5 year fixed mortgage....

An offset mortgage made sense a few months ago for reducing the mortgage term, as we'll have savings of c. 20% of the mortgage balance after purchase (and can add modestly each month). The flexibility of being able to dip in and out of the offset savings account, for rainy days, is worth something - if hard to quantify.

But now the cheapest 3.99% Virgin 5 year fix (not offset) beats the available offset rates. In our case that would save £75 - 150/month in mortgage payments depending on which one we go for. So by my calculations overpaying the mortgage by that £150/month plus our modest extra of a similar amount means the difference between offset and non-offset is more marginal.

And when you take into account that savings rates for ISAs and standard savings (including 1 year fixes) are higher than the mortgage interest rate, with one more base rate rise likely, it seems that an offset savings account won't be the most efficient for the rest of this year, based on market predictions. So managing your own "offset" account seems to be the better deal.

Caveats: nobody knows what the next 5 years will bring in terms of savings rates, or government reducing tax-free savings allowance. And the flexibility of withdrawing from an offset account is lost if you've overpaid a mortgage. But it still seems fairly evenly balanced at today's figures. Any thoughts...?

housebuyer143

I wouldn't do an offset at the moment unless you can offset the entire balance. That is my plan for the next remortgage 🤞🤞 
Then it doesn't matter that the rate is higher because you will be paying 0 interest. 

At the moment though I chose to take the lower rate, put my money in a high interest savings account. This is mainly because I don't want my money tied up in my house and want it readily available should I need it for any reason. Afterall, cash is king.

Rather than over pay each month have got considered putting that £150 in a regular saver account? They are in paying over 5% at the moment.

silvercar

Had an offset for 20 years and wouldn’t be without it. The security of having that cash available at any time is worth the extra it may cost in the short term.

SeekingLogic

Many thanks for your feedback @housebuyer143 and @silvercar - It goes to show how much value different people attach to different kinds of security and flexibility!

The other major factor in comparing these options is how much tax is paid on savings. With a more substantial lump sum going into savings due to house sale (e.g., £50,000) it is hard to use ISA allowances to avoid the tax on interest. Whereas in an offset all savings are tax-free. The calculations to compare are quite complex, but they're built into offset calculators like the Coventry for Intermediaries one, which still shows offset being the better bet, even when the non-offset interest rate is the same as a savings account rate.

dimbo61

Had 3 offset mortgages and for some people ( savers ) they are brilliant. 
Self employed ? Offset is a great  idea !
New access to cheap finance by saving into offset accounts.
Everyone is different  but you have already done your research  

jenni_fer

I love my offset, but it's definitely personal choice.

Factors here were:
1. The amount borrowed / percentage we could offset straight away  (we look at borrowing nearly double what we eventually did, for that higher amount the interest rate premium outweighed any benefit)
2. Tax on savings as rates increase (higher rate tax payer)
3. Need for flexibility, on a house with no work required it made sense to just borrow less, on a house that we'd like to extend it made sense to borrow the additional we think we'd need and get used to the monthly payment whilst just letting the money sit in the offset account while we work out what we actually want to do/get permission/find a builder etc etc

dimbo61

Jennifer has just mentioned another reason to consider offset mortgages.
If you are buying a project and have the Cash in the bank to pay the builder at each stage of the work to build your extension of install that new kitchen/ bathroom.
Going back to your lender or the bank  " cap in hand "to ask for more money can be difficult 

SeekingLogic

Yes, we've come to the same conclusion, @jenni_fer @dimbo61. We're looking to build a garden office and the flexibility to manage the financing from offset savings (can dip in and top up when it suits us) does seem to make the whole thing more financially efficient. Plus tax free offset benefits and ability to switch to "reduce monthly payments" if needed....