Whatever Happened To Offset Accounts?

WillPS

someone said:

We have had almost a decade and a half of sub 1% interest rates and during that period the regulatory environment has shifted too. I also wonder if property prices to income ratio increasing is also a factor.

What's interesting is the setup of the personal tax system and fiscal drag pulling more people into the 40% and 60% tax brackets. It means with higher interest rates more people would possibly benefit from offset products.

The YBS product has an interesting feature. With "Offset Plus" family and friends can designate their saving to offset your mortgage. I can see 40% and 60% tax bracket parents who are mortgage free been attracted to this. In effect they "gift" the interest tax free to their mortgage holding child. The effect of this gift could be significant as it would allow the child to pay more of the capital early in their mortgage period. The parents still have access to the money, it always remains their money with access allowed. I also think it would be outside the scope of inheritance tax ... no money or assets are exchanged - its just offset.

60%?! The top rate of taxation, applying on income over £125k is 45%.

eskbanker

WillPS said:

someone said:

We have had almost a decade and a half of sub 1% interest rates and during that period the regulatory environment has shifted too. I also wonder if property prices to income ratio increasing is also a factor.

What's interesting is the setup of the personal tax system and fiscal drag pulling more people into the 40% and 60% tax brackets. It means with higher interest rates more people would possibly benefit from offset products.

The YBS product has an interesting feature. With "Offset Plus" family and friends can designate their saving to offset your mortgage. I can see 40% and 60% tax bracket parents who are mortgage free been attracted to this. In effect they "gift" the interest tax free to their mortgage holding child. The effect of this gift could be significant as it would allow the child to pay more of the capital early in their mortgage period. The parents still have access to the money, it always remains their money with access allowed. I also think it would be outside the scope of inheritance tax ... no money or assets are exchanged - its just offset.

60%?! The top rate of taxation, applying on income over £125k is 45%.

Indeed, but the effective marginal rate between £100K and £125K is 60%, due to the reduction in personal allowance when earning in that range, i.e. for every £1 of gross income in that specific range, the tax liability increases by 60p.

WillPS

eskbanker said:

WillPS said:

someone said:

We have had almost a decade and a half of sub 1% interest rates and during that period the regulatory environment has shifted too. I also wonder if property prices to income ratio increasing is also a factor.

What's interesting is the setup of the personal tax system and fiscal drag pulling more people into the 40% and 60% tax brackets. It means with higher interest rates more people would possibly benefit from offset products.

The YBS product has an interesting feature. With "Offset Plus" family and friends can designate their saving to offset your mortgage. I can see 40% and 60% tax bracket parents who are mortgage free been attracted to this. In effect they "gift" the interest tax free to their mortgage holding child. The effect of this gift could be significant as it would allow the child to pay more of the capital early in their mortgage period. The parents still have access to the money, it always remains their money with access allowed. I also think it would be outside the scope of inheritance tax ... no money or assets are exchanged - its just offset.

60%?! The top rate of taxation, applying on income over £125k is 45%.

Indeed, but the effective marginal rate between £100K and £125K is 60%, due to the reduction in personal allowance when earning in that range, i.e. for every £1 of gross income in that specific range, the tax liability increases by 60p.

I see. Never realised that happened, seems deeply regressive that income between £100k and £125k is effectively taxed more than that earned after.

hugheskevi

WillPS said:

eskbanker said:

WillPS said:

someone said:

We have had almost a decade and a half of sub 1% interest rates and during that period the regulatory environment has shifted too. I also wonder if property prices to income ratio increasing is also a factor.

What's interesting is the setup of the personal tax system and fiscal drag pulling more people into the 40% and 60% tax brackets. It means with higher interest rates more people would possibly benefit from offset products.

The YBS product has an interesting feature. With "Offset Plus" family and friends can designate their saving to offset your mortgage. I can see 40% and 60% tax bracket parents who are mortgage free been attracted to this. In effect they "gift" the interest tax free to their mortgage holding child. The effect of this gift could be significant as it would allow the child to pay more of the capital early in their mortgage period. The parents still have access to the money, it always remains their money with access allowed. I also think it would be outside the scope of inheritance tax ... no money or assets are exchanged - its just offset.

60%?! The top rate of taxation, applying on income over £125k is 45%.

Indeed, but the effective marginal rate between £100K and £125K is 60%, due to the reduction in personal allowance when earning in that range, i.e. for every £1 of gross income in that specific range, the tax liability increases by 60p.

I see. Never realised that happened, seems deeply regressive that income between £100k and £125k is effectively taxed more than that earned after.

There are a few other examples of this, due to the means-testing of income at higher income levels that has been introduced. For example:

• £50,000 - £60,000 of taxable income and you have Child Benefit withdrawn. This produces effective tax withdrawal rates of 55% for 1 child, 63% for 2 children and 71% for 3 children. If receiving Universal Credit (which is still possible at these income levels), the effective withdrawal rates above increase to 80%, 83% and 87% respectively.
• At £100,000 of income all free childcare and tax-free childcare is withdrawn. This is a cliff-edge, so has an effective marginal tax rate in excess of 100%
• At £100,000 the Personal Allowance is withdrawn, giving an effective marginal deduction rate of 60%

The interaction of income with Student Loans, Child Benefit taper, Personal Allowance taper, higher-rate/additional rate tax, withdrawal of free childcare and tax-free childcare, as well as other means-tested benefits (notably Universal Credit) all mean that the net benefit of an additional £1 of income varies significantly, and in many parts of the income spectrum leads to very little take-home benefit.

You can benefit significantly from close engagement with income if you are in a household with a person earning £50,000+. Pension contributions in particular can be very beneficial.

someone

WillPS said:

someone said:

We have had almost a decade and a half of sub 1% interest rates and during that period the regulatory environment has shifted too. I also wonder if property prices to income ratio increasing is also a factor.

What's interesting is the setup of the personal tax system and fiscal drag pulling more people into the 40% and 60% tax brackets. It means with higher interest rates more people would possibly benefit from offset products.

The YBS product has an interesting feature. With "Offset Plus" family and friends can designate their saving to offset your mortgage. I can see 40% and 60% tax bracket parents who are mortgage free been attracted to this. In effect they "gift" the interest tax free to their mortgage holding child. The effect of this gift could be significant as it would allow the child to pay more of the capital early in their mortgage period. The parents still have access to the money, it always remains their money with access allowed. I also think it would be outside the scope of inheritance tax ... no money or assets are exchanged - its just offset.

60%?! The top rate of taxation, applying on income over £125k is 45%.

I had mixed up the "tax trap" @ £100k and and the additional rate @ £125k.

It seems we have had a long period of single changes which build a very complex structure. Most of these problems have been known for some time and arguably undermine the fairness of the system. The whole area is ripe for reform.

Net effect is more people than ever probably would benefit from offset mortgages.

artyboy

daveyjp said:

The Santander mortgage we had was an offset, but it was never marketed as such, just a fully flexible base rate tracker.

Any over payments reduced the term, but could also be borrowed back at any time without extending the mortgage period.  Worked really well when we did some improvements as it was very cheap borrowing and no application process.

Yep, that was/is our one - base rate + 0.5% for term. Made a very nice return on this in the days when you could get 2/3 year savings accounts that tracked at base +2% or more... including one from Santander themselves. I don't think we were very profitable customers 

elkiedee

I've just paid off my offset "current account" mortgage. I remortgaged to Virgin One in 2004, with a facility of 70K, actually never owed more than 60K, which was the same as my original 1998 mortgage. Interest rates were in several tiers based on facility rather than actual debt, and the lowest was anything up to/under 50% facility. I kept a conventional current account with the same bank I've been with since I was an 18 year old student, so didn't make full use of all offset options, and I'm glad I didn't have all my spending secured on our home. My partner is still working but was able to take a lump sum and small pension from his previous employment at 60, and the lump sum went to reduce our mortgage by more than 50%. I also had substantial savings with another bank and a building society which I kept separate, and for the last few months these were more than the outstanding balance.  Virgin One was quite a weird product and definitely wouldn't be right for everyone, but I don't regret it and think its flexibility worked quite well for me. I think if I'd taken it much further than I did and used it as a full blown current account, that could have got messy. Quite a bit of risk involved. You need to be disciplined and think about what you're doing. 

I can see lots of ways in which I could have made different decisions though. Some might have been better, but some could have been much worse. Maybe it just became too high risk for the various banks who ran it. At the end of last year it was clear that they were going to make it less flexible/useful than it had been, interest rates were going up and I decided it was time to pay it off.

elkiedee

My Virgin One mortgage facility was 40% LTV - and I don't think I ever actually borrowed more than 35%. House price inflation here meant that the last few years my mortgage was less than 10% LTV, and for the last few months it was perhaps 3%.

So I was quite lucky, and changes in house values and a long period of low interest rates kept the risk down for me. I think such a deal wouldn't work so well for someone in similar circumstances or who experienced similar changes now (having children, redundancy, not being in paid employment).

DJSINGH

Is there much less offset products on the market nowadays? I am looking for one but the best is currently 4.59 with YBS.