Fully offset mortgage - downsides?

[mdavids]

My mortgage is up for renewal next October. I'll owe £65k but have a bit more than that in savings at that point.

Current rate is 1.9% and I'm guessing by next October it'll be over 5%.

Although I'd like to be mortgage free, I don't want to wipe out the majority of my savings so I'm thinking take out an offset mortgage then if I need emergency access to the cash it's readily available.

Question is what are the downsides to this?

Off the top of my head I can only think that the rates are usually worse than a normal mortgage but as I won't be paying any interest this won't really matter unless I take out the cash.

I'm risk averse so I'm not fussed about not being able to invest the cash - the way I see it I'm getting a saving rate of whatever the current mortgage rate will be so probably about 5% which I'm happy with.

They're doesn't seem to be that many products out there, Barclays charge a ridiculous £1750 product fee so I won't be going there but at the moment Yorkshire BS have a fee free 2 year deal so if that's still available that's the kind of thing I'll be going for.

[BoRED S2upid]

How much emergency savings do you need? Take it down to £10k the interest will be tiny and it will allow you to build your savings back up very quickly.

[limpsfield]

mdavids said:

Off the top of my head I can only think that the rates are usually worse than a normal mortgage but as I won't be paying any interest this won't really matter unless I take out the cash.

Given what you are looking to achieve there aren't any obvious downsides apart from the higher rate as you mention, but as you say it won't affect you if you are at least matching the amount outstanding.

I had an offset for 10 years and will hopefully be moving back to one at remortgage time. I don't know how competitive first direct are these days, but that's who mine was with.

[mdavids]

How much emergency funds to keep is a good question. As much as possible i guess, you never know what's around the corner.

First direct have a minimum income requirement of either £50k sole, £75k joint which I just fall short of. Seems a bit odd, not sure why this would be, I'm with them for my current normal mortgage and had no issue meeting the requirements.

[BoRED S2upid]

I had one very briefly and couldn’t cope with seeing all my savings being offset against the mortgage it showed my balance as minus the mortgage amount which wasn’t good for the mental health. The OP wouldn’t see his £65,000 savings he would essentially see zero balance.

[Casa1862]

BoRED S2upid said:

I had one very briefly and couldn’t cope with seeing all my savings being offset against the mortgage it showed my balance as minus the mortgage amount which wasn’t good for the mental health. The OP wouldn’t see his £65,000 savings he would essentially see zero balance.

Depends how they do it, I've got one with The Coventry and you have a separate savings/current account and separate mortgage account , both show individual amounts, they are just linked to reduce the interest. I've set mine up to take the mortgage payment from the linked savings account, if fully offset then just forget about it, no interest to pay and savings balance available should you need it.

[DonkeyApple]

mdavids said:

My mortgage is up for renewal next October. I'll owe £65k but have a bit more than that in savings at that point.

Current rate is 1.9% and I'm guessing by next October it'll be over 5%.

Although I'd like to be mortgage free, I don't want to wipe out the majority of my savings so I'm thinking take out an offset mortgage then if I need emergency access to the cash it's readily available.

Question is what are the downsides to this?

Off the top of my head I can only think that the rates are usually worse than a normal mortgage but as I won't be paying any interest this won't really matter unless I take out the cash.

I'm risk averse so I'm not fussed about not being able to invest the cash - the way I see it I'm getting a saving rate of whatever the current mortgage rate will be so probably about 5% which I'm happy with.

They're doesn't seem to be that many products out there, Barclays charge a ridiculous £1750 product fee so I won't be going there but at the moment Yorkshire BS have a fee free 2 year deal so if that's still available that's the kind of thing I'll be going for.

It's Excel spreadsheet time.

My initial thought is that the fees will play a big role due to the small amount involved.

I'd be tempted to just go onto their zero fee standard variable and pay half off. The interest on the remains £30k loan will be partially offset by the interest you can get for your savings. Then pay down the mortgage at your leisure while being free and unencumbered by fee lock-ins to pay off at any time should rates go rampant or lock in at better rates if they come back down etc.

Running the options through a spreadsheet will give you the clarity to make the decision that is 100% personal to you as only you know the finer details that such a decision relies on in a scenario like this.

[LeoSayer]

I've had an offset interest-only mortgage with First Direct for £10+ years.

The net balance has been zero for much of that except at one point when I wanted to buy a car and didn't want to sell shares to fund it.

Emotionally, I'm ambivalent about the different possible scenarios eg.:
1. No mortgage
2. £65k savings and £65k 'normal' mortgage
3. £65 savings and £65k offset mortgage

The net value for all 3 above is £0, however no.3 effectively gives you a savings interest rates that matches mortgage rates plus a flexible borrowing facility which gets paid off automatically as you earn.

One thing to note (with my First Direct account) is that if you're in net credit then you don't get any interest on any current or savings account balances linked to the offset mortgage.

I think they're great products if you are in control of your finances and spending

[MaxFromage]

Ditto. I've had offset mortgages since 2011 and they've worked well for me due to holding cash balances (for a number of reasons) over the years. I maxed out the LTV on my house move last year, but am now fully offset with cash. £40K will be moved to ISAs shortly, and it's getting to the point where moving funds to fixed cash bonds will generate more income after tax than offsetting the cash.

Edited by MaxFromage on Tuesday 29th November 19:39

[xyz123]

We are in similar situation with offset nor. We are moving houses next year so saving up for it. Until recently I had all savings in mortgage offset account but have moved a lot of money to other savings account now due to Internet rate. I would think abt putting money in 1 Yr fixed savings account and then reevaluate after that. You can get close to 3%interest on 65K which is slightly better than leaving it all on offset account. Use cash ISA or joint accounts to stay below annual savings limit to avoid paying tax.

[Dicky Knee]

LeoSayer said:

I've had an offset interest-only mortgage with First Direct for £10+ years.

The net balance has been zero for much of that except at one point when I wanted to buy a car and didn't want to sell shares to fund it.

Emotionally, I'm ambivalent about the different possible scenarios eg.:
1. No mortgage
2. £65k savings and £65k 'normal' mortgage
3. £65 savings and £65k offset mortgage

The net value for all 3 above is £0, however no.3 effectively gives you a savings interest rates that matches mortgage rates plus a flexible borrowing facility which gets paid off automatically as you earn.

One thing to note (with my First Direct account) is that if you're in net credit then you don't get any interest on any current or savings account balances linked to the offset mortgage.

I think they're great products if you are in control of your finances and spending

This^.

I always keep this type of contingency now, taught by bitter experience. Banks are fairweather lenders and despite their marketing bks when you really do find yourself in a difficult situation they aren't going to help, particularly if you find yourself without any income for a period.

The only caveat, as pointed out above, is to ensure you are disciplined and don't fritter it away over time.

[drmotorsport]

We've had a First Direct offset interest only mortgage for about 20 years now. It's been handy in dealing with blips in income and been a cheap loan pot for cars too. Yes you do pay a higher rate of interest for the flexiblity but it's been worth it for us. We've been in the fortunate position of having a net zero balance for a couple of years but have no intention of paying off the debt. Excess savings i'm having to park elsewhere as FD don't do negative interest payments on loans.

[bmwmike]

So if you have 100k in a 100k offset mortgage there are no repayments required, as its effectively zero? If your income dropped to zero and you had to dip into that, wouldn't it then require repayments? I am just trying to wrap my head around how having your emergency fund in a offset mortgage works. Maybe i've misread the above points.

[mdavids]

bmwmike said:

So if you have 100k in a 100k offset mortgage there are no repayments required, as its effectively zero? If your income dropped to zero and you had to dip into that, wouldn't it then require repayments? I am just trying to wrap my head around how having your emergency fund in a offset mortgage works. Maybe i've misread the above points.

I think (and I'm happy to be corrected as I've only just started looking at these) that the first direct mortgage is an interest only mortgage that you can offset so if you have 100k savings and 100k loan you're basically paying nothing although have to prove you have a "repayment vehicle" in place. Others are repayment mortgages but the amount you pay is reduced by the amount of interest you're saving by using offset funds, so if you're 100% offset everything you pay is going towards paying off the mortgage with no interest being charged at all.

Thanks for all the replies, it sounds like its a positive idea, just hope something fee free is available in 6 months time.

[paulrockliffe]

It used to be that offsets were predominantly interest only, but they've stopped that now, so it's a bit of a carry-on if you use it as it's supposed to be used, access to capital and pay off the mortgage as quickly as possible.

We had an offset that was as basic as a massive overdraft on our current account, now we have to repay the Capital as putting the money you're not spending on capital repayments in the offset is not considered to be a suitable repayment vehicle.

We minimised our LTV, maximised valuation and borrowed as much as we could, then offset what we didn't need to maximise liquidity. This is used to be simple, but say you need £100k, but you borrow £200k and offset £100k, your repayment capital is based on the £200k, so you repay twice as much each month. But because you only needed £100k, you can just reduce the repayment by withdrawing capital anyway.

So all it really achieves for us is a blurring of the lines between what we save each month and what our mortgage payment really is. Nothing that can't be fixed in Excel, but a bit unnecessary.

If you can afford your mortgage payment fairly comfortably I think an offset will end up saving you money simply because you can dump any spare cash in as soon as you get it and reduce the interest by a significant amount over time

[SL22]

mdavids said:

Question is what are the downsides to this?

Off the top of my head I can only think that the rates are usually worse than a normal mortgage but as I won't be paying any interest this won't really matter unless I take out the cash.

Another advantage is that actually having a mortgage can be seen to be a good thing, say for other lending. Our current (fully) offset mortgage (Coventry) shows the ‘outstanding balance’ on a credit file, whereas our previous one (Santander) showed a ‘zero’ balance on the credit file. Not sure if it made a difference as it still showed the monthly payment coming out. For me this works by not having to introduce any further money to make the monthly repayment, as it is paid for from a direct debit from the offset saving account.

[Dicky Knee]

bmwmike said:

So if you have 100k in a 100k offset mortgage there are no repayments required, as its effectively zero? If your income dropped to zero and you had to dip into that, wouldn't it then require repayments? I am just trying to wrap my head around how having your emergency fund in a offset mortgage works. Maybe i've misread the above points.

Mine is a repayment mortgage and it works along these lines:

All the time I have 100% of the outstanding loan covered there is zero interest but the term of the loan continues to reduce. Taking an example of having £50k in an offset account against £50k outstanding loan with 10 years left. Each month the bank will take about £415 from the offset account to repay the principal on the mortgage but there is interest. At the end of month 1 you would have a mortgage of £49 585 and an offset balance of £49 585. If you then drew £2000 in cash from the offset, the mortgage is £49 585 and offset account £47 585 so the next month the bank would take £415 principal repayment plus the interest on the £2000 which is about £10 a month. Over time the interest reduces the offset amount so you end up paying a bit more but it comes from the offset account and not the £2000 cash you now have in your wallet.

Obviously if you took £2000 out every month after maybe 21 months the offset would be gone and you would have to have cashflow from elsewhere.

[bmwmike]

Thanks for the explanation!

[Slowboathome]

My first mortgage was a Virgin One offset. I work as a sole trader and basically put all my income into the mortgage. It worked brilliantly for me.