Offset mortgages and loans

dwileflunker

I wonder if anybody can give me some information regarding offset mortgages and loans. I have friends who have an offset mortgage with Nat West at 6.6% variable with 12 years to run and currently they owe £44000. They have money in their offset account and decided they wanted to withdraw £11000 of it to purchase a new car. They were advised by Nat West to keep the £11000 in their offset account and take out a loan for £11000 with Nat West @ 10.4% over 2 years (which they can afford to pay out of income). Nat West showed them a projection that overall they would save money by doing this but they are not sure as it seems illogical to borrow money at a higher rate.

My question is would the interest that they would save on the mortgage by keeping the money in the offset account exceed the interest the would pay in the 2year loan account (I appreciate that better loans are available with other lenders) and overall do you think this is a good strategy?

I hope I’ve made it clear as it all seems quite complicated and I’m not entirely sure which board I should post it on.

silvercar

I guess the bnk are saying that paying the loan off over 2 years is cheaper in the long run than borrowing the money (through the mortgage) over 12 years.

Also taking a loan will leave them with their offset savings intact, whereas taking money from the offset could leave them short of instant access to funds if they needed it.

Whether it is a good strategy depends on whether they have other savings they could call on if times bacame hard and if they are self disciplined enough to replensih their offset savings within 2 years (which is what the loan idea would do).

m1ntie

Is your friend a basic or higher rate tax payer? If the bank are saying it is cheaper to borrow the money I would guess your friend is a higher rate tax payer ie 40%.

If your friend has savings in an offset account he is effectively getting 6.6% interest tax free on his savings. If he is a higher rate tax payer this works out at about an eqivelent of 11% gross (depending when/how interest is calculated). If he is a basic rate tax payer ie 20% it works out at about 8.25%.

In other words in order to get 6.6% interest on savings after tax you would need to earn 11% or 8.25% depending on your tax rate.

Of course your friend will have paid tax on the money he uses to pay off the loan. On paper what the bank say is true but because there is no tax relief on the loan repayments it is a bit off an illusion.

I hope that was not to confusing!

Rick62

Of course 10.4% is higher than 6.6%, so of course they should use their own funds (opportunity cost of 6.6%) rather than take a loan at 10.4%.

The Nat West adviser is either an idiot, or is looking at his sales targets/commission.

Its not complicated, you don't need to start considering what rate of tax they pay or anything.