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Offset Mortgage-- A Scam Or A Good Deal


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In effect you have no savings at all

Your 'savings' work harder for you by offsetting interest than they do earning interest and then paying tax. Especially if you're a high rate tax payer.

Imagine someone who has £7K in a building society account and then takes out a £7K car loan. They're paying 10% on their car loan, getting 5% on their savings. By buying the car directly with their savings they would save themselves the 10% rate, but lose the 5% interest, a clear net gain.

Buckers

really,..but the tax efficiency? and no nestegg.

And what multiples do they apply?..and how often is the lending reviewed?

This is not a product for those who like to max out their resources.....and in troubled times, rather than going to the SMI, they would be tempted to use the headroom they had built up in the richer years.

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I asked myself the same question, but have just taken out an offset mortgage with Yorkshire Bank. I'll be paying around £100 more than I would have with a regular fixed or tracker mortgage, but having worked it out, it still makes sense financially for us and will save us money.

What really sold it to me was the fact I could work really hard to pay my mortgage off BUT always know I could access all that money if I lose my job, the boiler breaks down, we need a new car...etc.

It seems like a no brainer, if you want to pay your mortgage off as quick as possible.

you wont be claiming any SMI then.

surely better to claim than to pay yourself.

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I've had a Woolwich (now Barclays) offset since 2002.

Set up working for ourselves and needed something flexible - it had a minumum £10K 'reserve' or in other words overdraft.

We got this in case of lean months etc. when we may have needed a leg up.

We never really had any need for the reserve as things went well. We now have our mortgage 100% offset by savings - we could pay down the mortgage but there is no point. Every pound we pay off the principle amount is then added to your reserve as available funds. So you can be running down your mortgage commitment and still be cash rich at the same time.

We dont get interest because the offset merely reduces (or in our case) eliminates the interest paid on the mortgage. So even if mortgage rates went to 10% it would not affect us as we are 100% offset.

It is a great product and I will be taking the mortgage with me when we eventually move.

If you carry cash saving of a reasonable amount they make total sense. I will never change this mortgage.

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you wont be claiming any SMI then.

surely better to claim than to pay yourself.

You make a good point, but at the end of the day it's about protecting my family, our home and our future. I wouldn't base my plans on what I may or may not get from the government. Do you think they will really carry on with SMI for much longer?

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These have been around a very long time.

It is effectively a way of getting your savings to have the same interest rate as the hit you take on your mortgage.

So if you have a 100k mortgage at 5%, and 50k in savings earning 3%... then you may as well shift the savings into an offset account and reduce your annual payment by 5% of 50k - in other words saving yourself more money than you would have gained in interest.

Also has the benefit of being able to access your cash should you need it.

And don't forget if your mortgage is 5% you'll need a savings rate of about 6% to beat offsetting.. because you get taxed on savings but not on offsetting.

If you're good at investing you can make better returns, but offsetting is a relatively safe way to get your money to earn you a higher rate of interest than it otherwise would.

I approve of them.

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If you want to get more complex, in certain cases, it is possible to link accounts which are not those of the mortgagee as part of the offset. Scope to do a deal with rich relatives....if you have them....which I unfortunately don't!

Another good point.

If you have an offset mortgage running at 6%, and your mother/father/brother/sister/whatever have savings sitting in the bank earning 1% interest... tell them to put their cash in your bank account and you will give them a 4% interest rate personally. They win, you win, everyone's happy.

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These have been around a very long time.

It is effectively a way of getting your savings to have the same interest rate as the hit you take on your mortgage.

So if you have a 100k mortgage at 5%, and 50k in savings earning 3%... then you may as well shift the savings into an offset account and reduce your annual payment by 5% of 50k - in other words saving yourself more money than you would have gained in interest.

Also has the benefit of being able to access your cash should you need it.

And don't forget if your mortgage is 5% you'll need a savings rate of about 6% to beat offsetting.. because you get taxed on savings but not on offsetting.

If you're good at investing you can make better returns, but offsetting is a relatively safe way to get your money to earn you a higher rate of interest than it otherwise would.

I approve of them.

makes you wonder whats in it for the banks?

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to work out whether they are good or not is a simple case of working out the maths and the opportunity costs.

normally offest mortgages have an ever so slightly higher rate of interest than a normal variable rate mortgage.

depending on how much savings you have, there is usually a cut off point in which the offest mortgage is worthwhile.

e.g on a £200,000 mortgage the cut off point maybe £20,000 in savings. any more, and you are saving money, any less and the you would have been better off on a variable mortgage.

depeding on what your mortgage rate is and how much you have saved up - you just need to go through lots of different scenarios to work out what it is costing you.

Edited by mfp123
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Erm, what banks did that? Are you sure you're not just misreporting cases where banks took action against a debtor with chronic arrears? Never heard of them taking action against someone who wasn't in breach of contract.

Yes they did do this. It was reported on here.

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makes you wonder whats in it for the banks?

Mortgages are easier to sell than savings accounts.

Once you have picked your mortgage, you are unlikely to change it for quite some time. (Fixed @ 5 years for example). Whereas you could dart your savings around wherever.

It is in the banks interest to sell you an offset mortgage because they are then (almost) guaranteed your cash will sit in their bank rather than someone elses.

I believe it's all a promo to encourage mortgage customers to keep their savings with the same bank rather than in a competitor, since the more cash the bank has the more lending they can do and therefore more profit.

Edited by fadeaway
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to work out whether they are good or not is a simple case of working out the maths and the opportunity costs.

normally offest mortgages have an ever so slightly higher rate of interest than a normal variable rate mortgage.

depending on how much savings you have, there is usually a cut off point in which the offest mortgage is worthwhile.

e.g on a £200,000 mortgage the cut off point maybe £20,000 in savings. any more, and you are saving money, any less and the you would have been better off on a variable mortgage.

depeding on what your mortgage rate is and how much you have saved up - you just need to go through lots of different scenarios to work out what it is costing you.

can you offset house price falls?

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makes you wonder whats in it for the banks?

i guess, if you dont offset enough, the banks will make more money from you compared to a normal mortgage.

if you do have lots of money offest, you are essentially low risk.

most mortgages get paid out of peoples wages, cheque to cheque, which doesnt offer much saftey, so knowing that a customer has maybe 50k saved up as liquid capital and offsetting a mortgage is a big security for them.

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