Offset Mortgages

I can recommend the Intelligent Finance mortgage - but then I'm biased

In fairness, it's very competitive and if you have other borrowings you can add this to your total net 'borrowings' and if you have savings these will offset against any borrowings if required. This is tax efficient and I believe that only IF offer complete offsetting across all products (with the exception of a recently introduced stand-alone loan).

John

Offset mortgages tend to charge a higher interest rate, introductory offers notwithstanding.

Just go and see a professional mortgage broker - the one I use I have had about 4-5 mortgages with, they are based in Woking and so not a million miles from you, David.

PM me if you would like details. ( I am away from friday mid pm until sunday evening. )

No doubt someone will come back and say that all iFAs are crooks because the Mail says so.

Utter bollocks.

Regards

Mike

Spending money I don't have on things I don't need.

Following on from Mike's comment that they charge higher interest rates on Offset mortgages..

I was recently looking at whether an offset mortgage actually saves you all that much money, and was surprised to find that they may end up costing you more.

As Mike says, the interest rates are generally higher. Even if you do a rough calculation based on the difference between available rates over a single year you will find out how much extra interest this causes. Of course, your mortgage comes down over time (assuming it’s a repayment type) so this is the worst case number.
For example;
Best Offset rate of 4.84%, Best ‘other’ rate of 4.24%, Mortgage of £80,000.

(4.84 - 4.24)/100 * £80,000 = £480 extra interest

So how much does this mean you have to offset just to break even on interest?
If you’re bothered about the workings I can show them, but effectively it works out as £9,918.

The lovely calculations and graphs on the example sites have 2 main drawbacks. The first is that they always assume the other mortgage is on the same rate as the offset. The second is that some of them do not take into account the loss of credit interest you suffer on the offset amount, they just show you how much less interest you pay on the loan.

So how much credit interest would you lose in a year on £9,918? Current internet savings rates are 4% Gross so (again, roughly) this would be £396 before tax (£317 for basic rate tax payers and £237 for higher rate). Don’t forget that this is just the simple version – in reality you would have the effect of compounding interest over the years.

Finally, the other great benefit touted by Offset Mortgages is the ability to overpay to reduce your term. Guess what? Most mortgages let you overpay by up to 10% of the balance per year anyway.
In our example above you would have to want to pay more than an extra £666.67 per month to need the ability to pay more than 10%!


So there we are then our mythical mortgage costs an extra £480 in interest if you don’t have the offset, or up to £317 in lost interest if you do.

I was trying to keep this brief and failing so apologies! If anyone wants to know my assumptions or more accurate calculations let me know.


Regards,
Steve.

Edit - P.S I'm not a financial advisor, just an anorak where it comes to spreadsheets!!

Whether or not you wil benefit from an offset mortgage depends on the level of your savings relative to the level of your mortgage. I had some cash sitting in the bank as I have been saving quite a bit before selling my flat and buying a bigger house. I didn't want to invest the cash in a medium or long term investment as I will need it for the house move. Therefore, with savings approx half of my mortgage, its been a great (and tax efficent) way to reduce my mortgage as much as possible in a 2 year period whilst interest rates are relatively low.
But as Steve's detailed analysis shows, you need to consider your own personal circumstances carefully.
When I buy a bigger place and clean out a lot of my savings I will not be getting an offset mortgage.
Simon

I still think the best mortgage option at present is a tracker. Rates will go up in the short term but the fundementals dictate that they will come down again soon after. A tracker generally provides low rates and usually has no penalties or tie in periods, in other words, total flexibility.

Every other type of mortgage has some extra cost or penalty.

Regards

Mick

I cuurently have the Woolich Open Plan Offset mortgage. This a base rate tracker (base rate + 0.75%)
The real benefit IMO is the flexibility it provides me in borrowing. In some hands I can see this would be dangerous, but if your income is sporadic it actually works quite well.

Not the cheapest, but it works for me.

I considered the IF offset mortgage because at the time I had almost the same in savings as I did in my mortgage.

After making contact with IF I was put off however and eventually re-mortgaged with the Nationwide on a standard re-payment deal.

One further comment is that ofset mortgages can be very beneficial for higher rate tax payer.

A higher rate tax payer pays tax at 40% on Interest, by using an ofset mortgage this can effectively be avoided.


Regards


NB

Absolutely NB, and I take great pleasure in not paying over 40% of the interest on my savings to Gordon Brown. He'd only spend it on bombing someplace with it anyway
Simon

Gents,

Thanks for your insights so far.

I will do a bit more Web digging and see what I find.

We do have a IFA, but have not sought her advice for a few years now. so I might follow up too.

DS

OTD - Fastgraph - Site Servey