Mav RS

Can anyone explain the pro's/con's of offset mortgages
Who offers the best rates, Are they available for interest only mortgages
Is this viewed as one of the best ways to save on mortgage repayments??
any advice really on this subject would be appreciated

P111TJW

advantages : use savings to reduce capital balance without tying in funds; tax efficient (your saving as opposed to earning interest on savings therefore no tax to pay);can include all your borrowing and get it at mortgage rates; if its an all in one account (virgin one, Royal bank current account mortgage) its simple and you can get extra borrowing (ie car loan) at mortgage lending rates without taking over the full term of the mortgage (note, not all are like this, I.F. for example don't give you the loan element at mortgage rates);pay off borrowing quicker.
disadvantages : need good control of finances, very easy to run away with spending; rates are often not as good as some discounted/fixed products on the market, and there is plenty of these that don't tie you in (avoid tie in penalties at all costs), howevre, even though the rate is higher sometimes they can work out better as the money can be made to work harder for you within the all in one account.
Most do interest only, some don't even want policies assigned.
Woolwich used to be very strong - but most others have caught up and in some cases bettered in the last 12 months.
Hope this helps

Tim

[Edited by P111TJW - 10/15/2003 8:07:04 PM]

Mav RS

Thanks Tim for your response
Can anyone else add to this, some other views or prehaps some examples of how this would work on say a mortgage of 130k, what are the best rates at the moment?

douglasb

Hi Mav

An offset mortgage is a great idea is you have spare cash sitting in a deposit account. If you pay higher rate income tax, it is even better.

To keep the figures easy, assume that you have a £100K mortgage and want to offset £10K. Again assume that the mortgage rate is 5% and you can get 2% (gross) on a deposit account.

Your £10K deposit will get you £200 interest per annum which will be taxed. This means that you end up with £156 in your pocket if you pay basic rate, and £120 if you pay higher rate tax.

Use this to offset your mortgage and you are only paying interest on a £90K mortgage. Therefore you save £500 in interest (or if you keep your payments at the same level as you are paying before you offset, you pay off an extra £500 of your mortgage this year). To pay an extra £500 off your mortgage from taxed income would require you to earn £640 (basic rate) or £830 (higher rate).

Standard Life Bank allow offsetting on interest only and repayment mortgages. The money in the offsetting account is also available fairly quickly (a phone call gets them to transfer some cash to your normal current account within about 3 days if you have an unexpected bill, like a new central heating boiler - but that's another story).


Big benefit of offsetting is that the money is still accessible. It isn't as if you have used the money to repay part of the mortgage and thus might find it difficult to get hold of it again at short notice. You are effectively putting the money on deposit with the lender and saying "I don't want any interest on this money; I want to pay off my mortgage a bit quicker."

As long as you don't require the interest from a deposit account for day-to-day expenses and would prefer to pay off your mortgage a bit quicker, offsetting appears to be a great idea. You've probably guessed that I'm doing it myself.

Doug

Edited - I've now read Tim's post. Tim is talking of a current account mortgage. It's not quite the same thing (although the end result is similar as the lender uses other money that you have in accounts with them against what you owe them). With Standard Life's mortgage, additional borrowing (eg. for a car) is at the mortgage rate and can be for a shorter term. So you can borrow the cash to buy the car over 3 years even if the mortgage has another 12 years to run.

[Edited by douglasb - 10/15/2003 9:18:01 PM]

Mav RS

Thanks Doug, all usefull, anymore opinions please. What is the best rate at the moment?.how is the saving made ie per monthly payment or deducted from the end amount owed

Huge

Mav

I've got an offset with Intelligent Finance. At IF you are charged net interest each month (ie interest on o/s mortgage loan less gross interest receivable on savings).

Most offset accounts also allow you to 'overpay' against the mortgage as well as - obviously - adding to or drawing down from your savings whenever you want. You therefore effectively get a no-notice savings account at an interest rate that you'd normally only get on a savings account with a substantial notice period.

The numbers work for me but then I'm a higher rate tax payer with substantial savings.

You must ensure that the rates are realistic for you - offset mortgages have become very popular but I suspect that many people may really be better off with a traditional arrangement.

I don't know that all offset mortgages are available with a fixed rate option either.

Hugh

Dave P

Mav, I'm with Barclays Openplan. Barclays aren't the best but I've been very impressed with their online banking and the product. Firstly the rate is never more than .75% over base, so my rate is currently 4.25%,First Direct is never more than 1% over base.

I have been eying these up for some time now, but never fancied the Virgin One account because it was only one pot and I'm not that disciplined with money. Barclays allow you to offset upto about 15 different accounts, so we have, our current account, the kids accounts, a holiday account, a long term savings account and a short term savings account. In addition overpayments you make go into a reserve account which you can draw on as well. You can move money between accounts real time using the on line banking.

We have a 210k mortgage over a 25 year term which we opened in December. The last time I looked we were already down to 23 years and 3 months. They tell you on the online banking how much interest you have saved and how your term is reducing and what it would be if you were to keep your current levels of savings. To see how quickly you are paying off is a good incentive to keep saving.

As has been mentioned already you effectively get gross interest on your savings. We also play the 0 percent interest rate game. I have about 10k on a credit card which I shift about from one card to another, but I have the 10k in my offset account earning me 4.25%. Profit to me is £425 per annum. I should however mention that my offset accounts carry reasonable sums at times.

So at the end of the day it does depend on your personal circumstances. We have just finished our house, the car is in place and we now want to concentrate on reducing our mortgage. Previously when we were spending and running a significant overdraft this wouldnt have worked for us.

In addition you have to take an interest rate view as these aren't fixed......

All the best

Dave

Mav RS

Thanks Hugh and Dave.P
This is all very informative, Anyone know who has the best rate at the moment?

nkh

The rate depend on how much you are borrowing compared to the value of the property with Virgin so you'll have to look yourself or provide more details

fast bloke

Barclays and Woolwich seem to be best rate at BOE base rate +.75% (Strange that as they are now virtually the same company)

To make an offset account really work for you you need to have more than 10% of the amount of mortgage in current and savings account otherwise you would be better off in a cheap discounted rate and remortgaging every two years.

afaik Standard life isn't a true offset account. It is what they term a drawdown mortgage. They put an upper limit on your borrowing at any given time over the term of the mortgage and you can as long as you stay within that limit you can have access to instant mortgage rate loans.

The benefits suit a large number of people, but the people who make most of it would be a self employed 40% taxpayer. As your savings are saving you interest you are getting a net return of about 6.5% on the money you are setting aside to pay your tax bill. Set up your accounting year to give you longest possible term to pay this years tax bill and you can get the taxman to pay of a large chunk of your mortgage

civictyper

Not sure about the best rates but I'm going for the First Direct one as they are by far the best bank I've used in a long time (and no I don't work for them ). Customer service is 2nd to none and the 4.6% isn't bad either.

As with most, the term on additional borrowing can be varied and overpayments/underpayments can be made etc. etc.

With respect to offset mortgages I would say the biggest question you (or anyone) needs to honestly ask is "are you disciplined enough??".

Offset mortgages are great but having instant access to a very large overdraft and underpayment facilities etc can be suicidal if discipline isn't exercised.

I'm sure you're cool and that but we all know mates that are constantly in the red with overdrafts/credit cards etc. My financail advisor reckons that this is where the banks are looking to clean up. Traditionally borrowers switch from this bank to that bank (with cards and mortgages) and this is where they're losing out big style. By making things easier to the point of foolishness they will capture borrowers long term as some will not be able to change lenders once borrowed to the hilt. His theory is that the majority of joe public is in debt so it's better to be in debt with one bank than to have it spread between 3 or 4 banks. A tad pessimistic I know but probably not far from the truth.

On the brighter side (there's a brighter side ? ) if you can control what's going on then the things can work really well for you and save you loads of cash in the long run.

Also remember that whilst the interest on your savings will go into paying off the mortgage your savings will not be maturing so you will need to pay in your normal savings plus the interest rate (4.6% or whatever) if you want your savings to grow properly. Some would argue that making overpayment might be better than paying money into savings but I guess you need to work out which is best for you (doing both would be nice )

Cheers

Type-r

[Edited by civictyper - 10/16/2003 11:23:40 AM]

Mav RS

Thanks Fastbloke and CivictypeR
Anything to stop you switching between co.s as time goes on for better rate etc. Any tie in periods/redemption fees with these?

civictyper

Mav RS

Last time I checked First Direct weren't charging anything for moving lenders but that was a few months back. They've since changed the name of their offset mortgage though so may have made a few other changes too.

HTH

[Edited by civictyper - 10/16/2003 12:33:10 PM]

MattN

I'm with the woolwich and have found it to be useless now I'm moving.

On a remortgage they will lend 80% but only 75% against a new purchase. As I'm buying a new house it leaves me a bit short. The worst bit though is if I found the extra 5% to stay with them the extra 30k I would be borrowing would be at their standard rate (5.5%)! So I now have to jack it in and pay 2.5k in redemption fees' It's crap basically if you want to move. Works out to be the same monthly payment elsewhere but for the extra 5% plus the fee's.

Also, hope you never have to call them. I did, after 4 depratments I was told it may be best to pop in to my local branch. All I wanted to know was how much I could borrow.

Shame really as it's a decent rate.

nigelward

The Standard Life Freestyle Mortgage has an offset facility that can be added to it, this is in addition to the drawdown.

fast bloke

Cheers Nigel. Another one to add to the list

MattN - Woolwich will do 90% for purchase. At 75% they 'fast track' the process so you don't need proof of income, bank statements etc. Might be an idea to check this with them again as they don't have a dedicated mortgage team in the normal customer services centre, so you more often than not get some weird answers from them.

If you set up an Openplan offset account properly you can get the additional borrowing at the same rate as the rest of your mortgage. Take the entire amount as the laon with a token reserve facility. As soon as the mortgage completes pay of the difference between what you need and wht you borrowed. This is deemed to be an overpayment so now you can borrow back instead of using the SVR reserve.

Mav RS

Thanks for the advice everyone. If you are on an interest only setup, when do you reap the rewards i.e within the monthly repayment or at the end of term? i.e i take out an interest only set up for say £100k over a period of 10yrs at the end of term will i still owe £100k as with other "traditional" interest only mortgages or will this initial amount have reduced?

douglasb

Interest only for a fairly short term (like 10 years) with no means in place to build up the capital to repay the mortgage is not a good idea.

This is particularly true in days of low inflation. If 20 years ago, you had borrowed £15K (a sensible mortgage at that time) over 25 years as interest only, and had not moved house in the meantime, there is a pretty good chance that salary increases and savings would mean that you would have had £15 in the bank before now. So, you could have paid your mortgage off.

On your hypothetical £100K mortgage (and hypothetical 5% interest as mentioned in my original reply) a £10K offset deposit will pay an additional £500 per annum to your mortgage. Assuming interest rates don't change and that you don't increase your offset deposit, that only amounts to £5K over 10 years. (It will actually amount to a bit more as after 1 year your mortgage is only £99.5K, 2 years and it is only £99K, etc.)

You can of course pay more into the offset account each month to increase the offsetting effect. Bottom line though is that if you opt for interest only, you need to have some idea of how you're going to pay off the capital at the end of the term.

Doug

Mav RS

Thanks Doug, a good point this was a hypothetical example and probably not the best one,however you are right about having a vehicle in place to repay the outstanding amount.
incidentally have just found Abbey,Newcastle and Universal building soc's all running at 4% for term, ie BoE b/r +.5%
Newcastle has 6mnth intro offer of 3.4% then reverting back to 4%
most sites have a good working calculator so you can see your savings.
Anyone aware of any more favourable rates anywhere??