offset mortgage 29 January 2008 at 10:07AM in Mortgage-free wannabe 7 replies 957 views

cian

I looked at two building society's explanation of the offset mortgage they offer i.e. britannia and market harborough.

Britannia's:

For example, if you had a mortgage of £100,000 and savings of £10,000 we would only charge you interest on £90,000.
Even though your accounts are linked together, you still have complete access to your savings - and all the flexibility of separate accounts.

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Market Harborough's:

Here's an example of how our offset mortgage works:

Let’s assume that you have an Offset Account with £10,000 in savings and you have an interest only mortgage of £100,000. The £10,000 in the savings element of the Offset Account earns no interest. However an amount equal to the interest that would have been earned goes to reduce the mortgage balance - not to reduce the monthly mortgage payment.

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Given the same figures (100,000 mortgage and 10,000 savings) and assuming they got the same interest rates, does both of them work out the same over 15 years? Will one of them pay off quicker than the other? Any advice / comment is much appreciated

Martinslovechild

Yes, they both work the same way.

It's important not to reduce the monthly mortgage payment because the bank/building society wants you to remain on the original term whereas your primary motivation for signing up to one of these types of mortgages is to redeem it as fast as possible.

So -- whereas every time I made an overpayment to my bank they wanted to reduce my monthly payment (because they'd recalculate my monthly payments based on a new smaller outstanding amount owed but then assume that I wanted to remain with the original mortgage term - wrong!), I would phone them and reinstate the original monthly amount, thereby reducing the term and allowing me to redeem my mortgage earlier.

Essentially, the examples quoted with these types of mortgage are usually calculated on leaving £10,000 in your offset fund for the entire duration of the mortgage. In my experience, they're a particularly powerful mortgage product if you can afford to leave a lot more than this amount in there, not only because of the tax advantages (particularly if you're a higher-rate taxpayer), but also because you'll reduce the amount of mortgage interest charged by the bank to an absolute minimum.

julliff

I have an offset mortgage with Intelligent Finance.

You can choose how your mortgage is offset:

Lower Payments
Shorter Term
Reduced Capital

I'm not sure what the differnce is on 2 & 3 as I am on 1, but if you visit their website, I'm suer you will be able to find out.

HTH

angelavdavis

I switched to the Britannia offset in early December and have been happy so far. It allowed me to switch to offset so make "overpayments" that would still be accessible, but keep the setup costs to the minimum (other deals were more expensive in admin charges).

Negatives from my perspective:

1) They don't provide online access and there are limited branches near me with cashpoints, so the only method of finding out my savings balance is phone
2) I have had some issues moving money electronically into the savings account - the account details have been refused by some banking organisations' online systems.

Positives are:

1) I could move without too high a setup cost
2) I get to use an offset with an organisation I know fairly well
3) I still get the annual £250 bonus for being a member

Rafter

Offsets are great as long as you aren't paying a big premium for them.

If you are a virulent money saver you might be able to beat an offset using a best buy mortgage and a best buy savings account (particularly ISAs).

However, with larger amounts of savings, you are usually much better off with an offset, because you aren't paying 20 or 40% tax on your savings.

First Direct currently have some best buy products which are good - that way you get to offset your current account and any savings and are able to monitor the whole lot online a lot easier than some building society offset products.

R.

cian

thank you all very much for the input. i think i'll abandon the market harborough one as the only account i can link it to is the savings. thanks to rafter for pointing out first direct. i see the mortgage can be linked on the 1st account as well....and i can have £100 welcome.:T

angelavdavis

Yes I must admit, if it hadn't been for the fact that I was already with Britannia and the setup costs were so high with First Direct, it would have been a better option. Good luck with it!

jackomdj

I can recommend Lloyds TBS too. The great thing that they do is let you use other peoples money. We use some of my parents savings (still in their account that they can use & we don't have access to) & we just pay some money each month to cover their lost interest - but we are still better off doing it.

Nicky