Best Option?

Oldgrumpus24

I've got an offset repayment mortgage with 16.5 years to run on a variable rate of 7.4%. I'm in the fortunate position that  I have savings in the linked offset savings a/c that are currently about 70% of the remaining mortgage balance.

With Labour promising to levy VAT on school fees if (!) they win on 4 July, it seems that it would make sense to use a chunk of my offset savings balance to pay (some) of those fees up front before they become subject to VAT? I figure that I am currently 'getting' equivalent of 7.4% on my savings but if I use that money for the school instead, I could 'get' 20%  - albeit as a one-off saving i.e the threatened VAT on a year's fees? 

There is then the related question of whether to subsequently remortgage to a contract with a rate lower than I'm currently being charged, given that after using these savings to pay some school fees up front I'll have significantly less savings to offset against my mortgage. There seem to be 5 year fixed rates with an offset function available for about 5.2% (+ £1000 product fee). 

Obviously (and inevitably) there are some 'known unknowns' here but notwithstanding that, the more I think about the scenario, the more confused I get!  Any guidance from more experienced borrowers and savers would be much appreciated.

housebuyer143

I would definitely move to a cheaper offset, even if you don't pay off the school fees. 
If Labour get in, then it's not going to be an overnight thing, so maybe wait to see how they election goes? 

ACG

Im not sure your getting 7.4% on your savings. 
You could be on a mortgage rate of under 5% and getting a savings rate over 5% so that would mean your worse off as your "only" getting 5%, but in reality you are better off than you would be now. 

Also dont forget labour need to get in, it wont just get the VAT through overnight, it will have to go through parliament first. 

penners324

It's highly likely that VAT would be applied for a school year.

I doubt you could pay the whole lot in advance as you suggest

Oldgrumpus24

The offset savings account doesn't pay interest but as it is offsetting mortgage interest of 7.4% the notional 'equivalent' savings rate is 7.4%.  Or am I getting it wrong? 

BarelySentientAI

Oldgrumpus24 said:

The offset savings account doesn't pay interest but as it is offsetting mortgage interest of 7.4% the notional 'equivalent' savings rate is 7.4%.  Or am I getting it wrong? 

Sort of - but calculate it nett.

At the moment, you pay no interest and get no interest.  It doesn't really matter what % is listed against it.

If you paid some interest on the mortgage but got more interest from the savings - you end up with extra cash.

housebuyer143

Oldgrumpus24 said:

The offset savings account doesn't pay interest but as it is offsetting mortgage interest of 7.4% the notional 'equivalent' savings rate is 7.4%.  Or am I getting it wrong? 

Yes, but you are paying 7.4% on 30% which is terrible. If you went for a normal mortgage at say under 5%, you could actually get more money in an ISA and make money from savings interest.

If you are not offsetting 100% then you need to really look at many variables such as savings rates, tax, non offset rates and the amount of interest you are paying on the amount you are not offsetting. While it sounds good that you are not paying 7.4% interest on 70%, it isn't necessarily the best deal. 

Oldgrumpus24

OK, thanks for that.  But if I remortgage to a new offset at a lower rate than my current one, won't the fact that I'll be restarting ie at the commencement of a new repayment curve mean that most of the initial repayments each month will be weighted heavily to interest rather than capital so irrespective of any offset benefit, I'll still be paying more? And there's also the matter of the new product fee at say £1000.