Offsetting

SteveBentley

My Current Account and Mortgage are both with Intelligent Finance (IF), using their offsetting facility so instead of earning interest on my balance I don't pay interest on an equivalent portion of my mortgage.

Therefore I've been using my current account as a savings account, keeping everything in the same account so it's offset against my mortgage and I'm wondering if this is the best thing to do, to pay the mortgage off early. The mortgage is very flexible and allows regular and lump sum overpayments and overpayments can be withdrawn if necessary although I think there is a penalty for that.

There are three scenarios I'm considering:

1) Make a lump sum overpayment using some of the savings in the current account

2) Move some of the savings into an ISA, possibly with IF so I can keep the offsetting - I'm not sure how that would work as the ISA pays more interest than I pay on the mortgage

3) Keep the current arrangement

Any thoughts and advice would be welcome

gil13

I am sure you will get some interesting replies on this, I have been considering going along the offset route for a while and would be interested how you actually find it, the good and bad points.

The offsetting of ISA's is interesting, assume that at the end of the term when you have paid off advance that the offset ISA's having remained in a tax free shelter would then start to attract the interest as an addition to the balance - could be quite some amount in some cases I guess.

Also I would like to know how the offset savings are treated when it comes to things like tax credits and the like - is that a declarable item (even though you do not directly derive income from it). I could be wrong but do they not include ISA's on the credit form only income (above £300) from other sources?

First Direct have been having some good rates, but no ISA offset facility as far as I can tell.

I guess depending on how much you have offset, then I would probably be inclined to make a lump sum overpayment to knock a chunk off whilst continuing to offset and other investments.

SteveBentley

I find offsetting to be great, I'm paying £50 a month extra on my (admittedly small) mortgage, and with the offsetting I reckon I could take 10 years off the mortgage term.

Just phoned IF to get some clarification, and they tell me that there would be no benefit in me doing an overpayment, and no benefit in moving money to an ISA until the current account balance is more than the remaining balance on the mortgate.

So I guess I could take £3k out of the current account into a high interest ISA elsewhere, which would mean I was paying interest on an extra £3k of the mortgage balance at about 4%, but earn interest on it at about 6%, which equates to about £60 difference, so probably not worth the hassle.

Hobo_2

I would probably choose option 2

reasons i posted here

http://forums.moneysavingexpert.com/showthread.html?t=789207

Trying_to_be_good

SteveBentley wrote: »

Just phoned IF to get some clarification, and they tell me that there would be no benefit in me doing an overpayment, and no benefit in moving money to an ISA until the current account balance is more than the remaining balance on the mortgate.

They are right that there's no IMMEDIATE advantage, but the long-term advantage is, as previously stated, that your ISA savings would be in the tax shelter, and you only get one allowance each year. So if for ten years you maxed your ISA savings with IF (the only offset provider who offset ISAs, I think) you could end up with a big lump sum earning interest tax free. If that exceeded your mortgage amount, you would effectively be mortgage-free, but could keep paying off the capital of the mortgage as it still exists and keep the ISAs earning tax-free interest.

I think the theory goes that once your ISAs are bigger than the mortgage (i.e. effectively all offset), you keep paying the mortgage (say £500 per month) and start transferring your cash ISA at the same rate (£500 per month) to a better paying ISA provider. Making sure they do the transfer, that you don't take the money out etc as with normal ISA transfers.

So, for the long term, you're better having cash ISAs and offsetting them.

gil13

So it is definately a no-no to withdraw ISA cash to put in an offset savings account due to the fact that you lose the tax shelter in 10, 15, 20 years time? I guess that leads to finding the most competitive mortgage rate that allows to offset your ISA, pitty First Direct don't as far as I can see. Anyone know the best offset with the ISA function?

sleepless_saver

An alternative is the diy offset approach. You can probably do better than an offset, though it does need a bit more work.

Put your ISAs in a high interest account. I have just moved ours to Lloyds TSB at 6.5% for the next 12 months.
Get lowest mortgage rate possible. Mine is currently 4.95%.
Over a year with, say, a £60k mortgage completely offset by (joint) ISA savings, you would have £930 more than if you had both in an offset. Obviously this depends on keeping on top of the savings and mortgage rates, but this hasn't been too difficult in past few years. If it starts looking tricky, then I will switch to an offset.

The main point is that you then get the full benefit of the ISAs including compounding which you miss out on with the offset. And I really grudge the relatively high offset mortgage interest rates on the non offset amount.

Manage the current account by keeping in it only the minimum necessary to meet direct debits, and put all day to day spending on a 0% credit card. The money "saved" can either be put in a high interest account until the card needs to be paid off, or, depending on your mortgage, used to overpay temporarily. Any surplus which can't go in an ISA overpays the mortgage. This works for me because our spending patterns are predictable but wouldn't suit everyone.

I monitor all this with a spreadsheet showing state of play on last day of every month, adding together all savings accounts and current account balance and subtracting all debt (mortgage and 0% purchases credit card) to get a net worth figure. Doing this also reassures OH that I have not gone mad, since keeping the savings and the mortgage separate is a lot less intuitively appealing than the offset, or indeed just paying the mortgage off!

silvercar

sleepless saver, I see where your coming from but

(a) it seems more hassle
(b) re-fixing your mortgage on to a new deal every couple of years has costs, particularly if you are going for the cheapest rate possible as these tend to have higher charges and mortgage exit fees
(c) when you move iSAs and savings around there always seems to be 1-2 weeks when your money is nowhere, losing out on interest,
(d) you don't have quick and access to money that would otherwise be in you offset account.
(e) if your circumstances change you may not be able to secure the best mortgage deal around.

I've got a lifetime BoE base rate tracker, so I might not get the absolute best deal in percentage points, but I'm reassured in that I don't even have the cost of a phonecall to make.

Trying_to_be_good

I also 'DIY' offset my mortgage - I make sure my cash ISA pays more interest than my mortgage. There is no point (other than to keep life simple) in moving cash from an ISA that pays more interest to you than you'd save on your mortgage. However, if you have substantial savings OUTSIDE the cash ISA wrapper, it may still be worth taking an offset mortgage and ofsetting those 'surplus' savings.

The only offset mortgages that allow ISAs to be offset are IF and (as I've learned today) Woolwich/Barclays.

gil13

It is certainly an interesting area all this offset stuff and it is clear it depends on individual circumstances, I guess like most things. There was some interesting reader comments on a thisismoney article a while ago http://www.thisismoney.co.uk/mortgages/mortgages/article.html?in_article_id=416203&in_page_id=58

It terms on interest rates, if we look at the barclays offset which allows ISA offsetting then current rate is +0.69% of bbr, currently 5.94%, interestingly there are no ERC's with this one. The first direct fixes are quite attractive pitty they wont allow offsetting of ISA's with some of their fix rates - they would get even busier I suspect. Their 10 year fix is 5.49%, equivalent to 6.588 % for a lower rate taxpayer.

sleepless_saver

silvercar wrote: »

sleepless saver, I see where your coming from but

(a) it seems more hassle it definitely is a bit more hassle, but I quite enjoy the challenge. Sad, I know.
(b) re-fixing your mortgage on to a new deal every couple of years has costs, particularly if you are going for the cheapest rate possible as these tend to have higher charges and mortgage exit fees I factor these in, but the last deal before this one lasted 5 years, so not as much changing around as you might think.
(c) when you move iSAs and savings around there always seems to be 1-2 weeks when your money is nowhere, losing out on interest, -Not for ISAs, mine have always had the interest backdated to the exact date of transfer. True for other savings though.
(d) you don't have quick and access to money that would otherwise be in you offset account. Depends on personal circumstances, but the temporary stash in my instant access saver is adequate for my needs
(e) if your circumstances change you may not be able to secure the best mortgage deal around. I agree. I am lucky in that my circumstances are (at last) pretty stable, and I am just waiting for pension lump sum to pay mortgage off once and for all, which will leave me with a tax free nest egg.

I've got a lifetime BoE base rate tracker, so I might not get the absolute best deal in percentage points, but I'm reassured in that I don't even have the cost of a phonecall to make.

It's horses for courses really, and a lot of it is down to personal preference.

But the way offsets are marketed makes it look like if you want to offset, you have to do it all with one lender who then gets their hands on all your dosh. There are a few reasons why this might make one wary - cost, eggs in one basket if you then experience debt, or if the lender starts to have problems etc, so I wanted to flag up that there is an alternative.