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undersupply

Offset Mortgages

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These type of mortgages seem to be only recommended if you have a certain percentage of your borrowing as savings.

I would have thought that any savings would have made these beneficial mortgages but some authorities say as high as 20% of your borrowing as savings is needed to make these worthwhile.

Is this because the APR is typically higher on these mortgages?

If you did have 20% does this make your monthly repayments lower or do they shorten the term of the mortgage.

I've had a play with the Intelligent Finance offset mortgage calculator, but havent got all the answers from it.

Can you take your savings out, ie is it like a current account or are there penalties?

If you hypothetically borrowed £50k and put 50K worth of savings in the next day, would this mean you would have no interest to pay, only capital, or nothing whatsoever to pay?

Any one smarter than me care to shed some light?

Confused

B)

Undersupply.

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I did a brief analysis of my own situation at one stage taking into account

Differences between advertised rates for offset and fixed mortgages

Saving interest earned for non offset same savings at highest most common advertised rate less tax 20%

And I came up with around 40%

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I did a brief analysis of my own situation at one stage taking into account

Differences between advertised rates for offset and fixed mortgages

Saving interest earned for non offset same savings at highest most common advertised rate less tax 20%

And I came up with around 40%

So you seem to be saying they are a good mortgage regardless of how small your savings are?

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So you seem to be saying they are a good mortgage regardless of how small your savings are?

No, I am saying THEY ARE A REALLY BAD MORTGAGE. Put your savings in the bank at the highest interest rate and if you think that rates are going to go up fix your mortgage at the lowest if you don't mind locking in for the short-medium term.

Offsets tend to be about 1.2-2% more expensive than a non-offset deal. This is very rough and doesn't take account of reducible interest but over a year that isn't all that much:

Offset:

You borrow 100K

You pay 5.7%. (one account rate today)

You have 20K savings (ie. 20%)

That means that you pay about 4560 in interest (interest on 80K)

Normal:

You borrow 100K

You pay 4.48 on an average deal at charcol or whatever

You pay 4480 or so (already less than an offset)

You put 20K in the bank

Your really lazy so you stick it in a Natwest Advantage Premier and get 0.8% net interest (now I know Abbey is offering 6% for the first year for switching, so this may be a slight underestimation) you earn 160 pounds interest

4480 (the cost of the normal borrowing) - 160 (the extra money you earned on your savings) =

4320 cost of a normal morgage

4560 cost of an offset

Now if your getting the say 4.1% on your savings the difference is

4480 - 820 = 3660 as the overall cost of the - 80K of debt/holdings.

Now that is a saving to you of 900 pounds

Runs a bit but does it make sense? (maybe not! I hope it doesn't just make it more confusing) but...

Offset mortgages are a gip. They are for the now now now set that buy marketing tripe and are already in the poo for convenience and overspending.

It only works if you have a high income and expect to hammer a lot of money into your morgage fast... but even then? Buy gold with your 20K! (Is that still right Dr Bubb?)

Edited by Elizabeth

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What is offsetting?

With an offset mortgage, your savings, and in some cases your currant account,

are offset against your mortgage. This reduces the balance of your mortgage

and consequently the amount of interest that you pay.

You can still access your money as you would normally with a savings or currant account.

However, any money you take out means you pay more interest on your mortgage.

The general theory is that if your savings earn less interest than you’d pay

with an offset mortgage,you’d be better off offsetting.

e.g. If you’re earning 4% net interest on your savings and paying 5% interest on your mortgage,

you’d be better off using your savings to reduce your mortgage.

Is an offset mortgage for you?

The downside to offsetting is that they don’t offer the lowest interest rate.

As of May 2005 the best offset rate hovered around 5.25%.

although some do offer short-term discounted or fixed rates

for six months or so at lower rates.

On a standard mortgage you’d be able to pick up a two-year discount,

i.e. at around 4.55% or a two-year rate a 4.9%. so you may chase the best mortgage rates

and put your savings in an account with a high interest rate.

Whether you’ll be better off with an offset depends on how much you have to offset.

As a conservative estimate you’d need 20~25% of the value of your mortgage in

savings to benefit from an offset mortgage.

Who should offset.

people who don’t like to switch their mortgage regularly, have large amounts of savings and are

otherwise likely to stay with the same lender paying the standard variable rate.

Offsets aren’t so good for.

People who always chase the best mortgage and savings rates available and or have only

a small amount of savings to offset.

Which Magazine 2005

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Offset mortgages can be excellent. But as you say it depends on the amount of savings you can use. It also depends greatly if you are a higher rate tax payer.

I have been investigating mortgage deals recently.

Alliance and Leicester do a product whereby you effectively have 2 mortgages running side by side:

1) Part 1 a "standard" repayment or interest only or repayment/IO mix - 5 yr fix rate = 4.69%

2) Part 2 a offset tracker account 2 yr rate 4.39%.

As a financially prudent person we know we should hold approx 6 months salary as cash to allow for the proverbial rainy day.

So - instead of holding this "spare" cash in a conventional account earning 2.5% after 40% tax you pile all the money into the offset part. Of course you receive no interest but neither do you have to pay any either. So a saving (approx £200 a month in my case. Offset = £50,000, repayment mortgage =£300,000). The money in the offset account can be withdrawn and spent so it's not completely tied up in the property. (You do pay interest clearly).

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I had an offset mortgage on my first flat. It helped me pay down the mortgage much quicker than I would have done otherwise. However, I got caught out on 2 points:

1. My mortgage was with First Active (Britannic Money), one of only 2 players at the time offering a combined bank account/mortgage (the other being the Virgin One account). When I paid down my mortgage over and above a certain amount, First Active charged me a fee for being able to borrow that amount back. To avoid the fee, I had to commit to paying down that amount for good ie. I couldn't borrow it back. In other words I had the choice of reduced flexibility or increased charges. Not sure if they still operate this system but it's something to watch out for.

2. When the mortgage finished, I had to move all my standing orders from the mortgage bank account into a new current account - ie. with a high street bank. This is a legal requirement - the bank account cannot be kept open after the mortgage ends - and First Active sent me threatening letters asking me to close the account ASAP because the mortgage had ended. This was quite a hassle, as their customer service was appalling.

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No, I am saying THEY ARE A REALLY BAD MORTGAGE. Put your savings in the bank at the highest interest rate and if you think that rates are going to go up fix your mortgage at the lowest if you don't mind locking in for the short-medium term.

Offsets tend to be about 1.2-2% more expensive than a non-offset deal. This is very rough and doesn't take account of reducible interest but over a year that isn't all that much:

Offset:

You borrow 100K

You pay 5.7%. (one account rate today)

You have 20K savings (ie. 20%)

That means that you pay about 4560 in interest (interest on 80K)

Normal:

You borrow 100K

You pay 4.48 on an average deal at charcol or whatever

You pay 4480 or so (already less than an offset)

You put 20K in the bank

Your really lazy so you stick it in a Natwest Advantage Premier and get 0.8% net interest (now I know Abbey is offering 6% for the first year for switching, so this may be a slight underestimation) you earn 160 pounds interest

4480 (the cost of the normal borrowing) - 160 (the extra money you earned on your savings) =

4320 cost of a normal morgage

4560 cost of an offset

Now if your getting the say 4.1% on your savings the difference is

4480 - 820 = 3660 as the overall cost of the - 80K of debt/holdings.

Now that is a saving to you of 900 pounds

Runs a bit but does it make sense? (maybe not! I hope it doesn't just make it more confusing) but...

Offset mortgages are a gip. They are for the now now now set that buy marketing tripe and are already in the poo for convenience and overspending.

It only works if you have a high income and expect to hammer a lot of money into your morgage fast... but even then? Buy gold with your 20K! (Is that still right Dr Bubb?)

A couple of quick points:

IF has a tracker rate of 0.74% above base rate, if you have a 20% depoisit or equitity to that effect. so their current rate is 5.24%. That changes the interest on the mortgage to £4192. You do the rest of the maths!

You also need to add in all the arrangement fees (£199 for the IF mortgage with refunded valuation and remortgage legal fees).

'Special' rates end and transfer onto standard variable, so remortaging to another rate needs to be included.

edit: submitted early, pressed wrong button :P

Edited by erd

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Guest muttley

Can I use money in my Business Reserve against an offset mortgage? It occured to me that I would be liable for a lot of tax if I withdraw this money to purchase a house.Would I be better leaving it where it is?

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I haven't done the complete maths... but if you take the basic mantra as true:

"it makes sense if the interest you're paying on the mortgage is higher than what you'd receive on your savings", then:

1. You could also take out a lower interest fixed mortgage and put down a bigger deposit, or

2. If you can make a better rate on investments than you pay in interest it's better to keep the cash and invest it.

You would need to keep some float cash in a current account (which could be used in an offset) but any excess STR money that you don't need short term could be put to better use.

I won't do the full calculation until I come to buy, but that's my gut feeling.

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Can I use money in my Business Reserve against an offset mortgage? It occured to me that I would be liable for a lot of tax if I withdraw this money to purchase a house.Would I be better leaving it where it is?

Some providers allow you to offset more than one savings and current account.

If you have a mortgage in joint names, you may be able to offset only accounts that are in joint names.

But check with the provider - some do allow you to use sole accounts as well.

With some offset mortgages, you can even use friends' and family's savings accounts

to offset your mortgage (with their permission, of course).

Before you sign anything, though, it's best to get independent advice from a mortgage broker.

They should tell you whether an offset mortgage really is your best option and, if so,

which account is right for your needs.

Which magazine.

muttley: I couldn't find any reference to business reserves, I think you need to chat with a broker.

Tax-free advantage of offset mortgages

Savings in offset mortgages are free of tax, which gives them an added advantage.

Here's why. Imagine you owe £100,000 on your mortgage and have savings of £10,000.

If you don't offset your savings you'll pay interest on the full £100,000.

At 5 per cent you'd pay £5,000 interest. But if you offset £10,000, you'd pay £500 less in interest - £4,500.

Offsetting the £10,000 wouldn't be worthwhile, though, if you could earn more than £500 interest on your savings.

Unless your savings are in a tax-free Isa, if you're a basic-rate taxpayer, you'd need

a gross savings rate of 6.25 per cent to earn £500 on £10,000 - this would earn £625 interest,

you'd pay £125 tax and be left with £500. Higher-rate taxpayers would need a savings rate of 8.33 per cent.

To work out whether you'd be better off offsetting your savings, take the gross

interest rate you're currently earning on your savings and multiply it by 0.8

(the equivalent of deducting 20 per cent tax) if you're a basic-rate taxpayer, or 0.6 if you're

a higher-rate taxpayer. This gives you the net interest rate.

If your mortgage rate is less than this net rate, you're better off leaving your savings where they are.

Our calculations are for an interest-only mortgage. With repayment mortgages, the calculations are more

complex as the mortgage balance reduces each month.

Which magazine.

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What makes offset mortgages work is not the offsetting of savings, but the fact that the contents of your current account are offset against your mortgage on a daily basis. This means that half your salary (ish) is effectively knocked off your loan (tax free). This makes a big difference at the end of the loan when principal repayments make up the majority of the monthly repayment. The rapyement curves look a lot different.

With a typical mortgage (ie. typical ratio of net income to principal), going offset knocks around 7 yrs of a 30 yr loan. I've had one of these: it makes a big difference. The Aussie bank WestPac used to have a tool on their site for modelling the effect of offsetting a salary: it may still be there if you check out www.westpac.com.au

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I have been considering an offset mortgage for a while now and done a bit of research into it, however my siutation is a bit different.

I am currently living abroad and returning to the Uk in early 2007, i rent my house out ( positive cashflow a tenner a month!!!) and i will return with a substantial amount of savings in relation to my mortgage. For me the savings will be around 60 -70% so its a no brainer.

From what i see the advantages are as follows:

1. Flexibility

You agree an overdraft equal to the valuation of your house with the option to draw on this overdraft at any point in time but interest does accrue on this extra amount. This assumes that you have equity in your home. You can also reduce or increase payments very easily.

2. Save interest

The interest is calculated on a daily basis against the balance of your account, not just the lump sum.

eg

100,000 loan

20,000 saving

paid 2000 first day of the month

balance = 78,000

Pay interest on 78,000 for that day not 80,000.

So if you pay your wages in to the account this too will be offset as the interest is calculated daily. (as aussie bloke said) saving you more interest. However you do sacrifice the interest that could be earned in the bank.

3. Laziness

If you are lazy like me and cant be bothered to change mortgages every 2 years to save interest then it may suit. If you dont transfer over spare cash each month out of your current account and let it grow you will only be getting interest at less than 1%. In this situation you do nothing and the money works for you by saving cash.

In summary i'd say its for lazy people like me, with a fair amount of savings who want the flexibility of being able to underpay and overpay thier mortgage.

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Guest muttley

muttley: I couldn't find any reference to business reserves, I think you need to chat with a broker.

Thanks bb.When the time comes I will.

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I haven't done the complete maths... but if you take the basic mantra as true:

"it makes sense if the interest you're paying on the mortgage is higher than what you'd receive on your savings",

then:

1. You could also take out a lower interest fixed mortgage and put down a bigger deposit, or

2. If you can make a better rate on investments than you pay in interest it's better to keep the cash and invest it.

You would need to keep some float cash in a current account (which could be used in an offset) but any excess STR money that you don't need short term could be put to better use.

I won't do the full calculation until I come to buy, but that's my gut feeling.

I think this is the critical point. Don't go for a higher interest rate offset just so you can offset. Do the maths. There are a lot of people out there who go "well if I offset I am not paying interest on 1/2 my salary every month, so I get to 'save' that much interest. 1/2 your salary would probably be in the range of 750 to 1500 per month. The interest you would save on that on say 100K is between 450-900 odd at 4.8%. The extra cost of a 1% more expensive mortgage is 1,000. Just make sure you are not spending more on the higher interest rate than you are 'saving' by offsetting.

This mortgage was designed by Australian Banks. As an Australian all I can say is, Caveat Emptor!

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I have an off set mortgage - slightly more expensive but nothing I cant live with.

I also have £50K in an internet bank which pays FA after tax.

I am going to load this into my offset as I can off set 50% of my mortgage interest - which incidentally I believe is tax free because you are not getting interest paid. I am pretty sure this is more efficient after tax - unless you know better.

BTW mine is a woolwich tracker.

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Hate to be picky (no I don't). Are you American? The correct English is 'can anyone do the maths?'. Youre just plain wrong, period, talk to the hand cos the face aint 'listning', its a no brainer.

Has that cleared it up bud?

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Hate to be picky (no I don't). Are you American? The correct English is 'can anyone do the maths?'. Youre just plain wrong, period, talk to the hand cos the face aint 'listning', its a no brainer.

Has that cleared it up bud?

And u r who now?

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I have not done the sums for this.

However I have heard that if you are working in a profession where you have a certain type of cash flow, an offset mortgage can make sense.

One example is of someone self-employed who knows that s/he will have to pay taxes and can roughly estimate how much this is. They know that at some point in the next year this money has to be paid out, and should not be touched till then. In this situation putting it in an account linked to an offset mortgage can save more in mortgage interest than would be gained by putting this lump sum in a bank account. I'm sure there are other dependencies like how much tax you pay, what other investments you have, how risk-averse you are, etc.

Someone I know who is a contractor in IT does this. I would consider doing this if I went into that line of business if the sums make sense, but I'm too lazy to work them out right now.

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I have not done the sums for this.

However I have heard that if you are working in a profession where you have a certain type of cash flow, an offset mortgage can make sense.

One example is of someone self-employed who knows that s/he will have to pay taxes and can roughly estimate how much this is. They know that at some point in the next year this money has to be paid out, and should not be touched till then. In this situation putting it in an account linked to an offset mortgage can save more in mortgage interest than would be gained by putting this lump sum in a bank account. I'm sure there are other dependencies like how much tax you pay, what other investments you have, how risk-averse you are, etc.

Someone I know who is a contractor in IT does this. I would consider doing this if I went into that line of business if the sums make sense, but I'm too lazy to work them out right now.

I am a freelance construction industry professional with my own limited company. Therefore its sounds like I'm ok.

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A couple of quick points:

IF has a tracker rate of 0.74% above base rate, if you have a 20% depoisit or equitity to that effect. so their current rate is 5.24%. That changes the interest on the mortgage to £4192. You do the rest of the maths!

You also need to add in all the arrangement fees (£199 for the IF mortgage with refunded valuation and remortgage legal fees).

'Special' rates end and transfer onto standard variable, so remortaging to another rate needs to be included.

Yes this is the one I was looking at,the IF tracker 80, discounted for 2 years, seems like a total winner to me, if you can put your wages into it, along with savings.

I am self-employed, so my income fluctuates, and I have to save for tax, which could be offsetting my interest.

Anyone know any other good deals?

I imagine its a limited market.

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I have tried to post an excel worksheet that shows what I am talking about but it just isn't working. So. It all depends on the following variables:

Value of morgage

Cost of offset interest

Cost of standard interest

Value of interest on savings

The tax rate you are paying (I thought it was a fixed 20% on savings but it seems like I might be wrong!)

The ratio of savings to mortgage in relation all of the above

But if you really want to save money the best bet is just to get the lowest interest rate you can and use your savings to lower your original mortgage amount. Its terribly old fashioned and it doesn't let you fiddle with the levers, which I think is the real attraction of these complicated mortgages, but ultimately, it is the best deal.

Offsets tend to be taken with the grand idea of paying back early, but that relies on discipline. If you don't have a great track record for spending within your means then then really you are simply flattering yourself if you think that what you are doing is anything other than setting yourself up for constant MEW and constantly deferring the payment of the capital. They are a very convenient way to MEW (without seeming like your MEWing), but don't kid yourself that you won't pay for the convenience.

KNOW THY SELF.

DO THE MATHS

Now I will stop lecturing and go away ;)

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I have tried to post an excel worksheet that shows what I am talking about but it just isn't working. So. It all depends on the following variables:

Value of morgage

Cost of offset interest

Cost of standard interest

Value of interest on savings

The tax rate you are paying (I thought it was a fixed 20% on savings but it seems like I might be wrong!)

The ratio of savings to mortgage in relation all of the above

But if you really want to save money the best bet is just to get the lowest interest rate you can and use your savings to lower your original mortgage amount. Its terribly old fashioned and it doesn't let you fiddle with the levers, which I think is the real attraction of these complicated mortgages, but ultimately, it is the best deal.

Offsets tend to be taken with the grand idea of paying back early, but that relies on discipline. If you don't have a great track record for spending within your means then then really you are simply flattering yourself if you think that what you are doing is anything other than setting yourself up for constant MEW and constantly deferring the payment of the capital. They are a very convenient way to MEW (without seeming like your MEWing), but don't kid yourself that you won't pay for the convenience.

KNOW THY SELF.

DO THE MATHS

Now I will stop lecturing and go away ;)

Cheers for the help ,

You are right, I want a lot of flexibilty to pay f-all until 2008 and then overpay as much as I can as my financial situation improves.

:rolleyes:

Have always been pretty disciplined with money, but don't like the idea of a fixed commitment(you guessed it, I'm a bloke) :lol:

Any one who pays income tax at the top rate pays 40% on their savings interest, which is a total lead balloon.

I take your point about the MEWing, although there won't be much E to W, will there? :lol:

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Just to resurrect this one. I've had a Mortgage with Intelligent Finance for the past 4 years and I am very happy with them. While I could have got a more competitive deal on traditional mortgages, the main reason I stuck with them is the convenience. I moved abroad 2 years ago and have been renting the property since then. Key benefits for me are the ability to make regular overpayments over the internet and borrow extra money at short notice and with no hassle.

I did do a check with an independent broker six months back but the basic conclusion was that in my position there weren't a lot of benefits (being overseas, potentially wanting to sell in the next two years etc. etc.). Do I have savings worth 20% of my mortgage? No, not exactly- more like 10-15% at any period but I have managed to pay off around 15% of the mortgage in a very short space of time- this equates to something like paying the mortgage off 4 years early. It may be psychological but this is something that is very satisfying and encourages you to save more.

Agree that it only makes sense if you are able to spend within your means and if you can make regular contributions to your savings or mortgage overpayments. Fortunately I'm in this category and hope to stay this way even if I return to the UK.

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Just to resurrect this one. I've had a Mortgage with Intelligent Finance for the past 4 years and I am very happy with them. While I could have got a more competitive deal on traditional mortgages, the main reason I stuck with them is the convenience. I moved abroad 2 years ago and have been renting the property since then. Key benefits for me are the ability to make regular overpayments over the internet and borrow extra money at short notice and with no hassle.

I did do a check with an independent broker six months back but the basic conclusion was that in my position there weren't a lot of benefits (being overseas, potentially wanting to sell in the next two years etc. etc.). Do I have savings worth 20% of my mortgage? No, not exactly- more like 10-15% at any period but I have managed to pay off around 15% of the mortgage in a very short space of time- this equates to something like paying the mortgage off 4 years early. It may be psychological but this is something that is very satisfying and encourages you to save more.

Agree that it only makes sense if you are able to spend within your means and if you can make regular contributions to your savings or mortgage overpayments. Fortunately I'm in this category and hope to stay this way even if I return to the UK.

I think off set mortgages make good sense. If all things were equal why would you not have a offset option.

I think Yorkshire BS do one which is just 0.45% above base rate that's pretty good - a lot of people go on about these 2 yr discounted mortgages but IMHO these are just sucker deals the APR on them says it all.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • up 5%



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