Offsetting Mortgage Payments & more?

Bes

Bes

Bes

Soldato
Joined
18 Oct 2002
Posts
7,318
Location
Melbourne
Hi

Why on earth does this work? I understand it is not earning interest on your savings and not paying that interest on your mortgage but surely it will work out the same either way as your savings will be worth x more at the end?

Also would it not be better- rather than paying off your mortgage to stick the payments in an index linked ISA (10-12% growth) or invest them in shares and make a lump payment on your mortgage every year or 3?

Thanks
 
Bes said:
Hi

Why on earth does this work? I understand it is not earning interest on your savings and not paying that interest on your mortgage but surely it will work out the same either way as your savings will be worth x more at the end?

Also would it not be better- rather than paying off your mortgage to stick the payments in an index linked ISA (10-12% growth) or invest them in shares and make a lump payment on your mortgage every year or 3?

Thanks
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It works because you pay more interest on the debt than you can earn on your savings. If you have 10k in an ISA earning 5% and are paying 6% on your mortgage you would "earn" £100 per year by offsetting the savings against the mortgage.

As for the 10-12% growth ISA....that's past performance, and there's no guarantee of what the future performance may be. It could well be -10% p.a.
 
So if you have a 5K savings account you don't pay interest on 5K of your mortgage? I see :)

And as for the investment route it might not work every time, but if say 3/4 years are in profit (which going by my investment history I should be able to acheive and most of the time downturns in the indicies your tracker follows are relatively easy to see coming) then I reckon this could be a good idea.
 
Offset mortgages are particularly good for high rate tax payers, as the interest on savings would normally be paid at the higher rate. No interest is paid on the offset, but the saving in mortgage interest is higher then the taxed interest made on cash in a savings account.

Make sense?
 
Bes said:
So if you have a 5K savings account you don't pay interest on 5K of your mortgage? I see :)

And as for the investment route it might not work every time, but if say 3/4 years are in profit (which going by my investment history I should be able to acheive and most of the time downturns in the indicies your tracker follows are relatively easy to see coming) then I reckon this could be a good idea.
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You generally pay a higher interest rate on offset mortages though - Mortage companies have to make their money some how, its not in their favour for you to pay less interest over the lifetime of the loan.

I would get some spreadsheets done and compare the best offset and regular mortgages you can find and extrapolate the data over 25 years, or however long you expect to have you mortage, building in real world estimates of how much money your are likely to have in the bank and how much money you have spare each month.
 
Yeah but I would have thought the money saved in that sense would be like a tenner a year or something, if it was purely a tax thing? Unless you have mega savings of course!
 
Offset mortgages and ideas like Virgin One are great, if you can manage to keep everything in balance. The big way the mortgage companies make money is that most people fail to do this very well.
 
Yes, but you dont pay interest on stuff you've paid of, so if you keep your payments constant, pretty soon your paying of more capital than they intended, leading to less interest and then more capital paid of etc etc.

Its the interest that kills you, you spend your whole life paying interest and what do you get for that?

ISAs while attractive are not guaranteed plus you pay quite a hefty fee to join.
Its best to strike a balance, some risk, some safe.

But if at all possible avoid paying interest, its just money down the drain. :cool:
 
The other advantage of offsets is flexibility. They work very well if you have a large sum of money sitting around that you might need to use in the near future but you don't need it now. You dump it in your offset account and it reduces the interest on your mortgage. You can then take it back again for whatever you need to spend the money on.

If you put the money in an ISA, once you have taken it out, you can't put it back again because of the ISA rules, which set limits from year to year. If it is invested in equities, you may get stuck on a downturn in the market and not want to take it out at all when you need it.

If the surplus money is not in an ISA, you are paying tax on the interest/growth. In an offset the saving comes straight off your mortgage interest due - at the equivalent rate tax free.

From a recent Defaqto report:

The report identifies the affluent self – employed and higher rate taxpayers as those most likely to benefit from the underlying flexibility built into offsets. Provided the offset mortgage and saving rates trade-off at the industry average, offsets will be of particular value to borrowers who do not want to get involved in chasing the best saving rate or the cheapest mortgage.

Commenting on the report, David Black, Head of Banking at Defaqto and author of the report said, “If offset mortgages are approached as a fundamental part of the borrower’s financial planning process they can offer great benefits, both in terms of flexibility and in reducing the overall mortgage term. However, they are definitely products for the long haul and should not be contemplated unless borrowers are fairly certain that they will be able to leave what can be significant sums of money more or less untouched in savings accounts over the mortgage term. Any permanent reduction in the size of the deposit because of withdrawals will result in the borrower paying above market rates for the extra mortgage needed to balance the withdrawn savings.
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Offsets which involve a family group can be useful for first time buyers trying to get a rung on the housing ladder. The young person takes out the mortgage and then other members of the family keep their savings in designated linked accounts that reduced the mortgage interest due by offsetting.

The One Account (no longer Virgin) works by dumping your salary into an account with your mortgage. The idea is sound in principle but needs a lot of discipline.
 
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