Offset mortgages
Discussion
Suppose I have a 100K offset mortgage. If I put 60K savings into the same bank then I’m only paying interest on 40K. But what happens when I’ve paid the mortgage down to 60K?
Do I have effectively an interest free mortgage, or do I get a letter saying ‘the good news is you no longer have a mortgage, the bad news is you don’t have any savings’?
Do I have effectively an interest free mortgage, or do I get a letter saying ‘the good news is you no longer have a mortgage, the bad news is you don’t have any savings’?
Dr Jekyll said:
Suppose I have a 100K offset mortgage. If I put 60K savings into the same bank then I’m only paying interest on 40K. But what happens when I’ve paid the mortgage down to 60K?
Do I have effectively an interest free mortgage, or do I get a letter saying ‘the good news is you no longer have a mortgage, the bad news is you don’t have any savings’?
Depends on how you have set the mortgage up. In one scenario, the mortgage would continue, with all payments being against capital rather than interest*. That would obviously make the term shorter. Alternatively if you had set it up to have a lower payment, then you would have no payment each month.Do I have effectively an interest free mortgage, or do I get a letter saying ‘the good news is you no longer have a mortgage, the bad news is you don’t have any savings’?
You would still have access to your savings should you wish to remove them from the bank to invest or spend elsewhere.
*Some offset providers will not allow 100% offsetting.
I spoke to First Direct about this some time ago and their response was that they would send you a letter explaining your predicament. You'd then have to start shifting your savings so that you don't end up with more savings than mortgage.
They didn't explain what would happen to the interest on your savings i.e. whether they'd end up in a black hole etc. but just said that the scenario didn't work (I guess for obvious reasons).
My intention is to keep the upper limit (say £100k) but to maintain a mortgage of about £5-10k. Anything surplus would just go into an ISA to keep things tax free.
They didn't explain what would happen to the interest on your savings i.e. whether they'd end up in a black hole etc. but just said that the scenario didn't work (I guess for obvious reasons).
My intention is to keep the upper limit (say £100k) but to maintain a mortgage of about £5-10k. Anything surplus would just go into an ISA to keep things tax free.
They wouldn't be able just to wipe out the mortgage.
My understanding is that for any amount in savings over the size of the mortgage you would just be paid interest at the usual crappy rates.
They have no idea what you intend to do with the savings so for them to arbitrarily take them all and pay off the mortgage just because you happen to have a certain amount of savings is against pretty much every rule in the book.
Nice problem to have though!
My understanding is that for any amount in savings over the size of the mortgage you would just be paid interest at the usual crappy rates.
They have no idea what you intend to do with the savings so for them to arbitrarily take them all and pay off the mortgage just because you happen to have a certain amount of savings is against pretty much every rule in the book.
Nice problem to have though!
[quote=walm]My understanding is that for any amount in savings over the size of the mortgage you would just be paid interest at the usual crappy rates.[quote]
Not with every lender, some specifically say you'll earn no interest on any savings over and above the mortgage balance.
Not all Offset deals are created equal, so if anyone goes down that route, reqad the small print
Not with every lender, some specifically say you'll earn no interest on any savings over and above the mortgage balance.
Not all Offset deals are created equal, so if anyone goes down that route, reqad the small print
walm said:
They wouldn't be able just to wipe out the mortgage.
My understanding is that for any amount in savings over the size of the mortgage you would just be paid interest at the usual crappy rates.
They have no idea what you intend to do with the savings so for them to arbitrarily take them all and pay off the mortgage just because you happen to have a certain amount of savings is against pretty much every rule in the book.
Nice problem to have though!
They may be crappy rates but I don't honestly know another way of having XX amount of tax free savings. Unless the ISA rules suddenly change I think the offset way is a great way of keeping liquidity, wacking huge amounts of time/money off your mortgage and saving tax free.My understanding is that for any amount in savings over the size of the mortgage you would just be paid interest at the usual crappy rates.
They have no idea what you intend to do with the savings so for them to arbitrarily take them all and pay off the mortgage just because you happen to have a certain amount of savings is against pretty much every rule in the book.
Nice problem to have though!
Mine is currently about 2.5% but I think I'd struggle to achieve much more than this on a low risk ISA. If, like me you have well over the yearly ISA allowance then it really is difficult (for an amateur like me) to save in one place without handing anything over to the tax man.
Fatman2 said:
They may be crappy rates but I don't honestly know another way of having XX amount of tax free savings. Unless the ISA rules suddenly change I think the offset way is a great way of keeping liquidity, wacking huge amounts of time/money off your mortgage and saving tax free.
Mine is currently about 2.5% but I think I'd struggle to achieve much more than this on a low risk ISA. If, like me you have well over the yearly ISA allowance then it really is difficult (for an amateur like me) to save in one place without handing anything over to the tax man.
They are, my offset mortgage ran alongside a current account, with the amount in the current reducing the interest paid on the mortgage. There was the opportunity of also opening a savings account, but as you say crappy rates.Mine is currently about 2.5% but I think I'd struggle to achieve much more than this on a low risk ISA. If, like me you have well over the yearly ISA allowance then it really is difficult (for an amateur like me) to save in one place without handing anything over to the tax man.
walm said:
Fatman2 said:
They may be crappy rates but I don't honestly know another way of having XX amount of tax free savings.
I meant the regular savings rates, not the offset saving.The offset is awesome.
As you say, tax free AND far better than any regular saving rate.
Hereward said:
Sorry to hijack.
Are the cash savings in offset mortage accounts guaranteed to the same extent as savings in normal bank accounts (ie £85k per account), if the institution goes under?
Yeah, but no.Are the cash savings in offset mortage accounts guaranteed to the same extent as savings in normal bank accounts (ie £85k per account), if the institution goes under?
Your mortgage and savings would be offset by the administrators.
£100k mortgage with £60k savings, you walk away with a 40k mortgage.
£100k mortgage and £120k saving, I guess you would walk away with no mortgage and £20k under the guarantee, but that is guess work. Given some banks offer no interest on excess offset, it wouldn'tpay you to leave it in there too long anyhow.
We have had old fashioned normal repayment and have now offset.
We have notably more than the ISA allowance per year not interested in Premium bonds and want fully liquid cash.
Our rate is 2.39% and being high tax rate payer it makes even more sense as a risk free investment.
When we will be fully offset we would set up other savings accounts to avoid any potential lost interest and then change the direct debit from the current account to the fully offset savings account
Last year we extended our mortgage by a few hundred k as planning extensions etc and the rate was drastically less. However 7 months or so down the line we have not done anything regarding the extensions so the cash is sat in te offset account meaning the mortgage is the same level but at a lower rate.
Given I could be made redundant next week having that buffer of cash is in essence a few years salary and should get a job in the time - yes I clearly know id be increasing my debt and it would have to be repaid but otherwise we would not have had years of safety and instead need to find work ASAP
We have notably more than the ISA allowance per year not interested in Premium bonds and want fully liquid cash.
Our rate is 2.39% and being high tax rate payer it makes even more sense as a risk free investment.
When we will be fully offset we would set up other savings accounts to avoid any potential lost interest and then change the direct debit from the current account to the fully offset savings account
Last year we extended our mortgage by a few hundred k as planning extensions etc and the rate was drastically less. However 7 months or so down the line we have not done anything regarding the extensions so the cash is sat in te offset account meaning the mortgage is the same level but at a lower rate.
Given I could be made redundant next week having that buffer of cash is in essence a few years salary and should get a job in the time - yes I clearly know id be increasing my debt and it would have to be repaid but otherwise we would not have had years of safety and instead need to find work ASAP
I looked at the first direct one least week, it's an interest only mortgage and you need to show them that you have a repayment vehicle in place to pay off the capital at the end of the term. There was also a penalty for early repayment.
What that means is that if you treat the offset account as your capital repayment vehicle then you have complete control over when and how you pay off the capital. You also have access to the capital at any time throughout the mortgage. If you treat it that way then it's not really interest only, you just have a lot of control.
It's odd that there is an early repayment penalty, as if you borrow 100k over 25 years and after 10 years you've got 100k in the offset account you would just leave that money alone for 15 years rather than paying the penalty.
What that means is that if you treat the offset account as your capital repayment vehicle then you have complete control over when and how you pay off the capital. You also have access to the capital at any time throughout the mortgage. If you treat it that way then it's not really interest only, you just have a lot of control.
It's odd that there is an early repayment penalty, as if you borrow 100k over 25 years and after 10 years you've got 100k in the offset account you would just leave that money alone for 15 years rather than paying the penalty.
If there are any early closure fees it would be crazy to pay it off.
Also just hold £1 in it as say it is a 25 yr mortgage which you have cleared to £1 in ten years the loan is still live for 15 years in the future and will be the cheapest way to fund a car purchase unless you have the cash to buy outright.
Also just hold £1 in it as say it is a 25 yr mortgage which you have cleared to £1 in ten years the loan is still live for 15 years in the future and will be the cheapest way to fund a car purchase unless you have the cash to buy outright.
Welshbeef said:
We have had old fashioned normal repayment and have now offset.
We have notably more than the ISA allowance per year not interested in Premium bonds and want fully liquid cash.
Our rate is 2.39% and being high tax rate payer it makes even more sense as a risk free investment.
When we will be fully offset we would set up other savings accounts to avoid any potential lost interest and then change the direct debit from the current account to the fully offset savings account
Last year we extended our mortgage by a few hundred k as planning extensions etc and the rate was drastically less. However 7 months or so down the line we have not done anything regarding the extensions so the cash is sat in te offset account meaning the mortgage is the same level but at a lower rate.
Given I could be made redundant next week having that buffer of cash is in essence a few years salary and should get a job in the time - yes I clearly know id be increasing my debt and it would have to be repaid but otherwise we would not have had years of safety and instead need to find work ASAP
I am surprised that you are so adverse to Premium Savings Bonds.We have notably more than the ISA allowance per year not interested in Premium bonds and want fully liquid cash.
Our rate is 2.39% and being high tax rate payer it makes even more sense as a risk free investment.
When we will be fully offset we would set up other savings accounts to avoid any potential lost interest and then change the direct debit from the current account to the fully offset savings account
Last year we extended our mortgage by a few hundred k as planning extensions etc and the rate was drastically less. However 7 months or so down the line we have not done anything regarding the extensions so the cash is sat in te offset account meaning the mortgage is the same level but at a lower rate.
Given I could be made redundant next week having that buffer of cash is in essence a few years salary and should get a job in the time - yes I clearly know id be increasing my debt and it would have to be repaid but otherwise we would not have had years of safety and instead need to find work ASAP
Almost all my Higher Rate clients have some PSBs - quite a few have the maximum of £30,000 (£60,000 for husband & wife).
The current "interest rate" is 1.5% p.a tax free. This equates to 2.5% p.a. for a 40% taxpayer; 3.00% p.a. for a 50% taxpayer.
It's similar to the Lottery, except you don't lose your stake.
What's not to like?
Although not so instant as cash - repayments are usually available within a week or so.
Welshbeef said:
We have had old fashioned normal repayment and have now offset.
We have notably more than the ISA allowance per year not interested in Premium bonds and want fully liquid cash.
Our rate is 2.39% and being high tax rate payer it makes even more sense as a risk free investment.
When we will be fully offset we would set up other savings accounts to avoid any potential lost interest and then change the direct debit from the current account to the fully offset savings account
Last year we extended our mortgage by a few hundred k as planning extensions etc and the rate was drastically less. However 7 months or so down the line we have not done anything regarding the extensions so the cash is sat in te offset account meaning the mortgage is the same level but at a lower rate.
Given I could be made redundant next week having that buffer of cash is in essence a few years salary and should get a job in the time - yes I clearly know id be increasing my debt and it would have to be repaid but otherwise we would not have had years of safety and instead need to find work ASAP
I am surprised that you are so adverse to Premium Savings Bonds.We have notably more than the ISA allowance per year not interested in Premium bonds and want fully liquid cash.
Our rate is 2.39% and being high tax rate payer it makes even more sense as a risk free investment.
When we will be fully offset we would set up other savings accounts to avoid any potential lost interest and then change the direct debit from the current account to the fully offset savings account
Last year we extended our mortgage by a few hundred k as planning extensions etc and the rate was drastically less. However 7 months or so down the line we have not done anything regarding the extensions so the cash is sat in te offset account meaning the mortgage is the same level but at a lower rate.
Given I could be made redundant next week having that buffer of cash is in essence a few years salary and should get a job in the time - yes I clearly know id be increasing my debt and it would have to be repaid but otherwise we would not have had years of safety and instead need to find work ASAP
Almost all my Higher Rate clients have some PSBs - quite a few have the maximum of £30,000 (£60,000 for husband & wife).
The current "interest rate" is 1.5% p.a tax free. This equates to 2.5% p.a. for a 40% taxpayer; 3.00% p.a. for a 50% taxpayer.
It's similar to the Lottery, except you don't lose your stake.
What's not to like?
Although not so instant as cash - repayments are usually available within a week or so.
Rambaud said:
I am surprised that you are so adverse to Premium Savings Bonds.
The current "interest rate" is 1.5% p.a tax free. This equates to 2.5% p.a. for a 40% taxpayer; 3.00% p.a. for a 50% taxpayer.
?The current "interest rate" is 1.5% p.a tax free. This equates to 2.5% p.a. for a 40% taxpayer; 3.00% p.a. for a 50% taxpayer.
WHy are you calling them PSBs ? They're called Premium Bonds.
I hope you haven't suggested these rates of return to your clients, it would be completely mis-leading.
1.5% is the rate of interest on the prize fund is is certainly not the rate of return that savers should assume.
TFP said:
?
WHy are you calling them PSBs ? They're called Premium Bonds.
I hope you haven't suggested these rates of return to your clients, it would be completely mis-leading.
1.5% is the rate of interest on the prize fund is is certainly not the rate of return that savers should assume.
Yes, most "savers" get less than the "interest rate" and you can get get 2.8% + from an instant access account instead without the gamble on returns.WHy are you calling them PSBs ? They're called Premium Bonds.
I hope you haven't suggested these rates of return to your clients, it would be completely mis-leading.
1.5% is the rate of interest on the prize fund is is certainly not the rate of return that savers should assume.
TFP said:
Rambaud said:
I am surprised that you are so adverse to Premium Savings Bonds.
The current "interest rate" is 1.5% p.a tax free. This equates to 2.5% p.a. for a 40% taxpayer; 3.00% p.a. for a 50% taxpayer.
?The current "interest rate" is 1.5% p.a tax free. This equates to 2.5% p.a. for a 40% taxpayer; 3.00% p.a. for a 50% taxpayer.
WHy are you calling them PSBs ? They're called Premium Bonds.
I hope you haven't suggested these rates of return to your clients, it would be completely mis-leading.
1.5% is the rate of interest on the prize fund is is certainly not the rate of return that savers should assume.
"1. This agreement applies to NS&I Premium Savings Bonds Series B ("Bonds"), and these terms and conditions have been set pursuant to the National Loans Act 1968. These terms and conditions set out the obligations we have to you, as a customer, and the obligations you have to us. Please read these carefully and keep for reference."
2. I have indeed advised my clients of the interest rate(s) over the years. In my previous post, I used inverted commas to distinguish it from the usual interest rates - and they know that it was/is an average, so it was/is possible to receive nothing or much more. I have clients who have received over 100% - i.e. their winnings were more than their holding.
fandango_c said:
Yes, most "savers" get less than the "interest rate" and you can get get 2.8% + from an instant access account instead without the gamble on returns.
But generally most people with a mortgage have one more than £30k and the rate of the mortgage is higher than the rates you state and those rates are 100% guaranteed or saved vs a gamble on the premium bonds. Gassing Station | Finance | Top of Page | What's New | My Stuff