Offset Mortgages -- the Numbers

J_B, the formulas do work for you, you just have to look at it kind of in reverse.

The purpose is to determine whether an offset mortgage or separate mortgage/savings products are to your advantage. Most people who would use the formula do not have an offset, they have savings and a mortgage. For them it is a question of whether they would gain by going to an offset.

In your case, you already have an offset, so the question is whether or not you would gain by going to separate products. To do this, you would have to be able to get another mortgage. You said IF was the only one you could get, but I suspect now you may be able to get another by virtue of having built up some history with your current mortgage.

So if you are thinking about remortgaging, you could look at what is available right now on mortgages (I haven't looked recently, so don't know). Then, you could compare it to what you would get on savings if you weren't in an offset mortgage (ISA, maybe 5.5% with cahoot, which would then need to be adjusted for tax). Plug those numbers into the formula along with your offset mortgage rate with IF and that should tell you whether you are better off with IF offset or by remortgaging to a low fixed rate or discount mortgage.

I hope all that is clear, if not please post again (with specific figures, if you want), and I'll try to clarify it more.

Very busy these days, so if you post more please also pm me to let me know, otherwise I may not see it for a few days.

PS I value your contributions and DiggingOuts enormously.

Flattery will get you everywhere, especially if it is accompanied by large cheques in the post. ;D ;D

J_B, if you check the thread which was referenced in my first post, it was a discussion as to whether or not an offset mortgage was worthwhile compared to other, cheaper mortgages. The prior calculation to which I referred was to determine the break-even point -- how much savings you have to have to make an offset mortgage more beneficial than another mortgage. If you check the link, I think you will see what I mean.

So the point of the calculations is to compare two scenarios -- offset and non-offset, by using offset rate vs. nonoffset rates (mortgage, savings, & current account). By using those rates, you can find the break-even point for how much savings you have to have to make an offset worthwhile. If your savings exceeds the breakeven point (on a percentage basis), the offset is more beneficial.

You should not assume that I missed out on tax implications without reading the definition of terms:

SavingsRate -- this is the rate you can get on your savings -- AFTER taxes

also in my post to you

ISA, maybe 5.5% with cahoot, which would then need to be adjusted for tax

If I did miss out on tax implications, I would definitely be one whose head would roll (figuratively, in employment terms).

However, you raise an interesting question. If the after tax savings rate that someone could get outside an offset mortgage IS INDEED equal to the offset mortgage rate, what happens to my formula? Because indeed, that would result in a division by zero, which is infinity!

What conclusion do we draw from this? That I am wrong? Perish the thought! As my mother used to say, wash your mouth out with soap for even suggesting such a thing!

If the offset rate is equal to the non-offset after tax savings rate, then it will take an infinite percentage of the mortgage debt in savings to break even with the offset mortgage. Because no matter how much savings you have, if you can do as well with your savings outside the offset mortgage, then the offset provides NO benefit at all. You will always be better off with the cheaper non-offset mortgage (at least from a strictly mathematical perspective, leaving the flexibility issues out of it). If you had £100 billion in savings to offset it, you would still be better off with the cheaper non-offset mortgage. As you said, the answer is infinity.

The fact is that most of us ordinary mortals cannot get an aftertax savings rate as high as our mortgage without using an offset. This is the benefit of offsets -- and especially for higher rate taxpayers, for whom aftertax savings rates are not particularly thrilling.

J_B, that is true only with the offset.  But comparing offset to non-offset, on the non-offset side of things savings is taxable.

I think I understand the problem.  When I defined terms, I just used the term SavingsRate.  I meant non-offset savings rate, but it isn't entirely clear in the original post.  I'll edit it to clarify.

edit: Please check the original post with definition of terms for savings rate and current account rate and see if that makes things clearer.