Offset mortgage - charges when fully offset

jm2

Hi everyone, my tracker mortgage is fully (actually over) offset so I expect no charges. However I have noticed that when there is an interest rate rise I incur a fee. The bank tell me this is because the charges are calculated for the forthcoming month but the "offset allowance" is calculated from the preceding month so as interest rates climb the two don't quite balance out. The thing is, my offset account is higher than my mortgage account but the bank don't seem to want to take that into consideration. Has anyone else come across this?  

silvercar

Yes. We have the same. The T&Cs say that anything over the mortgage account won't gain interest. We just put up with it as a cost of having the offset.

MWT

jm2 said:

The thing is, my offset account is higher than my mortgage account but the bank don't seem to want to take that into consideration. Has anyone else come across this?  

Quite normal, we had this with Balrclays (Woolwich) on our offset mortgage.

The helpful thing with their version was you could select which savings 'pots' were used for the offset and which were not, so it was always possible to adjust to not have any excess which would not earn interest.

jlfrs01

I too have an OffSet but it's a fix so I'm not picking up any charges, however - my understanding is if there's more in the Offset Savings Acct than what the loan is for the delta is effectively doing nothing. It can't be offset and it can't earn interest so either move into a conventional savings product or pay some of the balance off.

silvercar

OPs point is that with increasing interest rates, the interest calculated at the lower rate on the savings vs the interest charged on the higher rate on the borrowing (because they are a month apart and interest rates increased in the mean time) mean that OP is charged interest on the loan at the difference between the interest rates.

The fact no one gains interest on anything over the total mortgage on the savings is something we all know.

CSI_Yorkshire

silvercar said:

OPs point is that with increasing interest rates, the interest calculated at the lower rate on the savings vs the interest charged on the higher rate on the borrowing (because they are a month apart and interest rates increased in the mean time) mean that OP is charged interest on the loan at the difference between the interest rates.

The fact no one gains interest on anything over the total mortgage on the savings is something we all know.

An easy way to fix it in the OP's situation would be that the cap is applied on the amount of interest that can be earned from the savings account, not on the balance of the savings account that can earn interest.

Only works in the case of an overflowing savings part though.

id311299

I am also interested in this topic, especially how Barclays handle fully offset mortgages. Initially I was under the impression that if the balance in your offset account is equal or bigger than the outstanding mortgage principal, you are simply paying zero interest, your whole monthly contractual repayment goes towards the principal, and that's the end of it. Here is my understanding of some gotchas that I have learned from this thread:

- Banks will usually calculate the 'offset credit' arising from your offset account on a certain month, using the applicable interest rate for that month, and then on the following month that calculated amount will be applied towards the interest on the mortgage. This means that:

- on months with fewer days you will earn less 'offset credit' than the mortgage interest for the following month, and there will be interest to be paid for 1,2 or 3 days for that month. This means seven (or six in a leap year) days of interest that will have to be paid for each year, even for a 'fully offset' mortgage;

- if the interest rate rises and the offset mortgage is variable/tracker, the 'offset credit' from the previous month will be less than the mortgage interest for the following month from the moment when the interest rate rise took place, and the bank will charge for that difference in interest.

These gotchas are not insignificant, as the 5 year offset tracker I am eyeballing has interest rate that translates to £17 a day in my case, so that's £119 a year, or almost £600 for the whole product term. And this doesn't even take into account the rate change gotcha...

Is the above acurate and covering all the gotchas with variable/tracker offset mortgages?

Thank you

CSI_Yorkshire

You're comparing the wrong months.  Usually:

id311299 said:

- on months with fewer days you will earn less 'offset credit' than the mortgage interest for the following month, and there will be interest to be paid for 1,2 or 3 days for that month. This means seven (or six in a leap year) days of interest that will have to be paid for each year, even for a 'fully offset' mortgage;

No.  A fully offset mortgage at static interest rate does not incur interest charges.

id311299 said:

- if the interest rate rises and the offset mortgage is variable/tracker, the 'offset credit' from the previous month will be less than the mortgage interest for the following month from the moment when the interest rate rise took place, and the bank will charge for that difference in interest.

Yes.

It's like at the start of each month the bank looks at the balance and says "how much interest will this balance earn at today's rate", and then at the end of the month they look back and say "how much interest did it actually earn at the rate applicable each day".  If "actual" > "will", you pay the difference.

id311299

CSI_Yorkshire said:

You're comparing the wrong months.  Usually:

id311299 said:

- on months with fewer days you will earn less 'offset credit' than the mortgage interest for the following month, and there will be interest to be paid for 1,2 or 3 days for that month. This means seven (or six in a leap year) days of interest that will have to be paid for each year, even for a 'fully offset' mortgage;

No.  A fully offset mortgage at static interest rate does not incur interest charges.

Apologies, I should have pointed out what I found on the Barclays website (I probably assumed that most banks operate in the same way):

If I have exactly the same in savings as I have on my offset mortgage, will I pay or receive any interest?

This is called 100% offset and theoretically it will mean you pay no interest on your mortgage and receive no interest on your savings.

In reality there will be slight anomalies as credit interest uses the actual number of days in the calendar month, while debit interest divides the year into 12 (so each ‘month’ is 30.4 days).

For example, in a 28-day February, the credit interest applied in March will be for 28 days while the debit charged will be for a twelfth of the year, ie 30.4 days. There will therefore be a difference.

To me this means that following a 28-day February with its 28-day offset credit you have a debit for 30.4 day March, which leads to a shortfall of 2.4 days which ends up being charged by the bank. There will be also a few months with 0.4 days shortfall, which is likely also calculated and charged by the bank.

CSI_Yorkshire

id311299 said:

CSI_Yorkshire said:

You're comparing the wrong months.  Usually:

id311299 said:

- on months with fewer days you will earn less 'offset credit' than the mortgage interest for the following month, and there will be interest to be paid for 1,2 or 3 days for that month. This means seven (or six in a leap year) days of interest that will have to be paid for each year, even for a 'fully offset' mortgage;

No.  A fully offset mortgage at static interest rate does not incur interest charges.

Apologies, I should have pointed out what I found on the Barclays website (I probably assumed that most banks operate in the same way):

If I have exactly the same in savings as I have on my offset mortgage, will I pay or receive any interest?

This is called 100% offset and theoretically it will mean you pay no interest on your mortgage and receive no interest on your savings.

In reality there will be slight anomalies as credit interest uses the actual number of days in the calendar month, while debit interest divides the year into 12 (so each ‘month’ is 30.4 days).

For example, in a 28-day February, the credit interest applied in March will be for 28 days while the debit charged will be for a twelfth of the year, ie 30.4 days. There will therefore be a difference.

To me this means that following a 28-day February with its 28-day offset credit you have a debit for 30.4 day March, which leads to a shortfall of 2.4 days which ends up being charged by the bank. There will be also a few months with 0.4 days shortfall, which is likely also calculated and charged by the bank.

Yes, that's right.  Although it's 28 days of February credit against 30.4 days of February debt according to their description.

Of course, your 31-day May/August/October interest would be offset against a 30.4-day charge. Overall there are 365 days of credit interest against 364.8 days of debit interest.

That then gets into the wording of what the 'cap' is - where many lenders say "you cannot earn interest on any balance above the mortgage balance", rather than "you cannot earn any interest more than that incurred on the mortgage balance".  In the first case, which is most common, they balance out but you have "slight anomalies" month to month.  In the second case, they do not, because you only have the monthly imbalances where you must pay interest without the ones that you earn interest.