Offset mortgages
Discussion
I've never really looked at offset mortgages before but curious on them as a mechanism to reduce monthly mortgage costs given rising rate environment (I am 18 months from remortgaging so it's hardly keeping me up at night, but good to know the options in advance!).
I am curious to know - what are the down sides?
My context; 37 y/old, own ltd company, £1mn house with £500k remaining on mortgage. Currently on interest only, which gives me scope to keep the monthly payments low and then I make overpayments from dividends that I take or pay to my wife who is a shareholder in the business.
I tend to usually have quite a high cash balance as I put money aside monthly for the following years income tax bill. So effectively administer a PAYE scheme on myself to make sure I am never behind. That cash is sat in a Chase account earning 3% or so.
Am I right in thinking if I did an offset mortgage today I'd be paying 6% odd on £500k, but if I use £150k of cash for the offset I'd only be paying 6% on £350k?
In principal this seems a solid option, but there's no such thing as a free lunch and I don't see them talked about much so must be reason why - would welcome any insights!
I am curious to know - what are the down sides?
My context; 37 y/old, own ltd company, £1mn house with £500k remaining on mortgage. Currently on interest only, which gives me scope to keep the monthly payments low and then I make overpayments from dividends that I take or pay to my wife who is a shareholder in the business.
I tend to usually have quite a high cash balance as I put money aside monthly for the following years income tax bill. So effectively administer a PAYE scheme on myself to make sure I am never behind. That cash is sat in a Chase account earning 3% or so.
Am I right in thinking if I did an offset mortgage today I'd be paying 6% odd on £500k, but if I use £150k of cash for the offset I'd only be paying 6% on £350k?
In principal this seems a solid option, but there's no such thing as a free lunch and I don't see them talked about much so must be reason why - would welcome any insights!
I used to have an offset mortgage that I held onto for a long time. My info may be little out of date.
The best interest rate was generally only available with at a LTV ratio of less than 50% with higher rates at different LTV tiers. Interest rates will generally be higher than more typical mortgages.
Need to have good financial discipline not to blow your available facility all at once on a new car for example.
There's generally a rough plan and I generally regarded my "ahead of plan" figure as the amount of money I actually had.
The best interest rate was generally only available with at a LTV ratio of less than 50% with higher rates at different LTV tiers. Interest rates will generally be higher than more typical mortgages.
Need to have good financial discipline not to blow your available facility all at once on a new car for example.
There's generally a rough plan and I generally regarded my "ahead of plan" figure as the amount of money I actually had.
You can offset against Cash ISA with Barclays I think. Could be an option for offsetting a larger amount without liquidating any positions.
I too would consider this product when the time comes, one imagines they’re not that popular because knowledge of them is low, and many of the general public haven’t got any money to offset against?
I too would consider this product when the time comes, one imagines they’re not that popular because knowledge of them is low, and many of the general public haven’t got any money to offset against?
simon800 said:
I've never really looked at offset mortgages before but curious on them as a mechanism to reduce monthly mortgage costs given rising rate environment (I am 18 months from remortgaging so it's hardly keeping me up at night, but good to know the options in advance!).
I am curious to know - what are the down sides?
My context; 37 y/old, own ltd company, £1mn house with £500k remaining on mortgage. Currently on interest only, which gives me scope to keep the monthly payments low and then I make overpayments from dividends that I take or pay to my wife who is a shareholder in the business.
I tend to usually have quite a high cash balance as I put money aside monthly for the following years income tax bill. So effectively administer a PAYE scheme on myself to make sure I am never behind. That cash is sat in a Chase account earning 3% or so.
Am I right in thinking if I did an offset mortgage today I'd be paying 6% odd on £500k, but if I use £150k of cash for the offset I'd only be paying 6% on £350k?
In principal this seems a solid option, but there's no such thing as a free lunch and I don't see them talked about much so must be reason why - would welcome any insights!
The downside is the rate offered.I am curious to know - what are the down sides?
My context; 37 y/old, own ltd company, £1mn house with £500k remaining on mortgage. Currently on interest only, which gives me scope to keep the monthly payments low and then I make overpayments from dividends that I take or pay to my wife who is a shareholder in the business.
I tend to usually have quite a high cash balance as I put money aside monthly for the following years income tax bill. So effectively administer a PAYE scheme on myself to make sure I am never behind. That cash is sat in a Chase account earning 3% or so.
Am I right in thinking if I did an offset mortgage today I'd be paying 6% odd on £500k, but if I use £150k of cash for the offset I'd only be paying 6% on £350k?
In principal this seems a solid option, but there's no such thing as a free lunch and I don't see them talked about much so must be reason why - would welcome any insights!
There are very few Offset options available currently and what are available, are higher than standard rates. So you save interest on whatever funds you are using to offset the mortgage but the rate on what remains is high.
If you take out an Offset mortgage and do not offset any funds or do not have a substantial amount to put in there long term, then you are left with an expensive mortgage.
It's perfect if you have a large amount, relative to your mortgage, that you can keep in the offset account long term.
As noted, rates are always higher. The other downsides are mainly that you need to be the sort of person who isn't tempted to spend the cash that you have sitting there. They aren't talked about much because most don't have that ability, the cash sitting around or they'd rather invest spare cash in equities (historically).
The difference in interest rates is significant when you consider taxation. If you're a 40% taxpayer, that 6% saving on £150K is actually 10% gross, or to see it another way, Chase are only paying 1.8% post tax versus 6% on the offset.
The difference in interest rates is significant when you consider taxation. If you're a 40% taxpayer, that 6% saving on £150K is actually 10% gross, or to see it another way, Chase are only paying 1.8% post tax versus 6% on the offset.
I have one with the Woolwich via Barclays (not sure how that happened, it was arranged by my broker).
The current rate is 6.49% but I've managed to save a huge amount as a result of offsetting. (IIRC I save about £400 pm). the mortgage is effectively paid off but the overpayments are in the offsetting account. It gives me a lot of flexibility in either overpaying or drawing down previous overpayments if I need the cash for any reason.
i think if you're a "saver" or have access to the Bank of Mum and Dad it makes a huge amount of sense.
The current rate is 6.49% but I've managed to save a huge amount as a result of offsetting. (IIRC I save about £400 pm). the mortgage is effectively paid off but the overpayments are in the offsetting account. It gives me a lot of flexibility in either overpaying or drawing down previous overpayments if I need the cash for any reason.
i think if you're a "saver" or have access to the Bank of Mum and Dad it makes a huge amount of sense.
I've had an offset since 2007/8 with First Direct.
£230k mortgage, ends in 4 years so the capital will be due to be paid back in full.
1% above base tracker so now on 6%, which is painful after time at 1.01%.
To lower costs I've cashed in all my ISAs and the money now sits in a savings account connected to the offset account.
Halved the monthlies so man maths says I'm effectively earning 6% on my deposit and using those earnings to pay half the mortgage.
No financial vehicle to pay off the capital so house needs to be sold soon!
£230k mortgage, ends in 4 years so the capital will be due to be paid back in full.
1% above base tracker so now on 6%, which is painful after time at 1.01%.
To lower costs I've cashed in all my ISAs and the money now sits in a savings account connected to the offset account.
Halved the monthlies so man maths says I'm effectively earning 6% on my deposit and using those earnings to pay half the mortgage.
No financial vehicle to pay off the capital so house needs to be sold soon!
Sarnie said:
The downside is the rate offered.
There are very few Offset options available currently and what are available, are higher than standard rates. So you save interest on whatever funds you are using to offset the mortgage but the rate on what remains is high.
If you take out an Offset mortgage and do not offset any funds or do not have a substantial amount to put in there long term, then you are left with an expensive mortgage.
It's perfect if you have a large amount, relative to your mortgage, that you can keep in the offset account long term.
Thanks for this succinct overview - very helpful There are very few Offset options available currently and what are available, are higher than standard rates. So you save interest on whatever funds you are using to offset the mortgage but the rate on what remains is high.
If you take out an Offset mortgage and do not offset any funds or do not have a substantial amount to put in there long term, then you are left with an expensive mortgage.
It's perfect if you have a large amount, relative to your mortgage, that you can keep in the offset account long term.
MaxFromage said:
The difference in interest rates is significant when you consider taxation. If you're a 40% taxpayer, that 6% saving on £150K is actually 10% gross, or to see it another way, Chase are only paying 1.8% post tax versus 6% on the offset.
Very good point! And those rates you are saving (6%/10%) are actually around historic equity market returns. So whilst I'd be seeing this option as something I'd do with a separate pot (i.e. tax savings and rainy day cash) there may even be an argument to repurpose £'s due for next years S&S ISA allowances if they can guarantee a return around those figures.simon800 said:
thanks for comments from everyone on this, very helpful and good to see how others are using offsets. I understand they probably dont suit the majority of people, but in certain circumstances could be very interesting! Cheers.
I'm not sure about how suitable they are for many people but I think they're not widely known about!In my view it works well for me (thanks Sarnie for arranging!) as before I was overpaying the mortgage and this way gives me more flexibility so when I've saved for bigger purchases such as a new car or kitchen then saving it in the offset has worked well as well.
The interest rate overall is definitely not as good so it depends on your situation and outlook but if you have a decent rainy day fund (in % terms vs. your mortgage) in case the worst happens then to my mind an offset could well be good for you.
There is a neat little trick you can do with a flexible cash isa where you can use your annual isa allowance (20k), withdraw the money and pay it into your offset mortgage, and as long as that money is repaid into the ISA at the end of the tax year, it maintains its isa status.
2 days into the new tax year, repeat again.
As there is no clawback with missed isa contribs this is a useful trick if you can be bothered with the hassle
2 days into the new tax year, repeat again.
As there is no clawback with missed isa contribs this is a useful trick if you can be bothered with the hassle
thekingisdead said:
There is a neat little trick you can do with a flexible cash isa where you can use your annual isa allowance (20k), withdraw the money and pay it into your offset mortgage, and as long as that money is repaid into the ISA at the end of the tax year, it maintains its isa status.
2 days into the new tax year, repeat again.
As there is no clawback with missed isa contribs this is a useful trick if you can be bothered with the hassle
That's interesting and something I wasn't aware of, presumably you could build it up year after year with 20k per year but actually moving 40k in year 2, 60k in year 3 like that as well?2 days into the new tax year, repeat again.
As there is no clawback with missed isa contribs this is a useful trick if you can be bothered with the hassle
NowWatchThisDrive said:
In theory yes although I can envisage some operational risk if you try and cut it too fine - e.g. you try to redeposit your multiple years of ISA contributions the day before the end of the tax year, computer says no for some reason and it takes the provider a day or two to get it sorted...or not, and you lose the ISA status on the whole lot.
Yes this is something I'll need to look into. I'll have 2x 5 year's ISA contributions in 3 year's time that will need to offset my mortgage from 2026 to 2029 (currently interest rates are much higher outside the offset than in it), then they'll be free again once the mortgage is paid by other means in 2029. The overall advantage on already having these funds tax-free is huge for all the years from 2029 onwards, so worth the headache.Why wouldn’t you use the product I mentioned from
Barclays who seemingly allow you to offset against a cash isa?
https://www.barclays.co.uk/help/savings-and-invest...
Just wondering if I’m missing something obvious. Seems like having cake and eating it to me on a glance.
Barclays who seemingly allow you to offset against a cash isa?
https://www.barclays.co.uk/help/savings-and-invest...
Just wondering if I’m missing something obvious. Seems like having cake and eating it to me on a glance.
I had a Barclays (historically Woolwich) OS mortgage and as Okgo says, they allow you to offset ISAs held with them. It’s a significant advantage over many providers. You do of course, forfeit the interest on the ISA, but the (likely) gain on mortgage interest saved and the lifetime tax shelter makes it very much worthwhile.
It worked very well for me, but my deal was 0.75% over base rate for the life of the mortgage, the current rates may not make it quite so attractive of course.
It worked very well for me, but my deal was 0.75% over base rate for the life of the mortgage, the current rates may not make it quite so attractive of course.
okgo said:
Why wouldn’t you use the product I mentioned from
Barclays who seemingly allow you to offset against a cash isa?
https://www.barclays.co.uk/help/savings-and-invest...
Just wondering if I’m missing something obvious. Seems like having cake and eating it to me on a glance.
It may well work for some, but they appear to only offer trackers at the moment.Barclays who seemingly allow you to offset against a cash isa?
https://www.barclays.co.uk/help/savings-and-invest...
Just wondering if I’m missing something obvious. Seems like having cake and eating it to me on a glance.
Sarnie said:
simon800 said:
I've never really looked at offset mortgages before but curious on them as a mechanism to reduce monthly mortgage costs given rising rate environment (I am 18 months from remortgaging so it's hardly keeping me up at night, but good to know the options in advance!).
I am curious to know - what are the down sides?
My context; 37 y/old, own ltd company, £1mn house with £500k remaining on mortgage. Currently on interest only, which gives me scope to keep the monthly payments low and then I make overpayments from dividends that I take or pay to my wife who is a shareholder in the business.
I tend to usually have quite a high cash balance as I put money aside monthly for the following years income tax bill. So effectively administer a PAYE scheme on myself to make sure I am never behind. That cash is sat in a Chase account earning 3% or so.
Am I right in thinking if I did an offset mortgage today I'd be paying 6% odd on £500k, but if I use £150k of cash for the offset I'd only be paying 6% on £350k?
In principal this seems a solid option, but there's no such thing as a free lunch and I don't see them talked about much so must be reason why - would welcome any insights!
The downside is the rate offered.I am curious to know - what are the down sides?
My context; 37 y/old, own ltd company, £1mn house with £500k remaining on mortgage. Currently on interest only, which gives me scope to keep the monthly payments low and then I make overpayments from dividends that I take or pay to my wife who is a shareholder in the business.
I tend to usually have quite a high cash balance as I put money aside monthly for the following years income tax bill. So effectively administer a PAYE scheme on myself to make sure I am never behind. That cash is sat in a Chase account earning 3% or so.
Am I right in thinking if I did an offset mortgage today I'd be paying 6% odd on £500k, but if I use £150k of cash for the offset I'd only be paying 6% on £350k?
In principal this seems a solid option, but there's no such thing as a free lunch and I don't see them talked about much so must be reason why - would welcome any insights!
There are very few Offset options available currently and what are available, are higher than standard rates. So you save interest on whatever funds you are using to offset the mortgage but the rate on what remains is high.
If you take out an Offset mortgage and do not offset any funds or do not have a substantial amount to put in there long term, then you are left with an expensive mortgage.
It's perfect if you have a large amount, relative to your mortgage, that you can keep in the offset account long term.
I had an offset for a while when I had cash savings nearly covering the outstanding mortgage. It was the best of both worlds. In effect I had nearly paid off my mortgage, but could instantly access the cash if needed.
I then invested the cash in S&S and I was stuck with a high interest mortgage.
When the deal expired I went with a fixed rate and my payments dropped significantly.
An offset mortgage is good if you are in business and your income is a bit chaotic, you can keep a 'buffer' of money in your current account and it's not doing badly earnings wise.
It's good for 'normal people' with a steady wage, because they effectively get a good rate on their current account which does rack up over a year, and that's tax free.
It's effectively tax free instant access which is nice for any higher rate tax payer.
But a really good low rate ordinary mortgage might blow it into the weeds, you have to do the numbers for your own case, not mine or Mr Average.
Also in the long run, you need to have clue where your 'finishing line' might be.
Some people are trying to be mortgage free at 55, some want to pay the minimum interest over the next 10 years, some are aiming for retirement at 60 or something.
This made me uncomfortable about the 'rolling ISA into offset' stuff, to me it was important to arrive at 50/55 with the mortgage paid off and some investments in an ISA.
In my view there are at least 4 things to be balanced:
Property/mortgage
Pension
Other investments
Spending your money on the things you want to do.
I had an offset, it was a good deal overall and a useful part of my plan, but I'd be careful about letting it drive your overall strategy, particularly when your mortgage starts to shrink in real terms.
It's good for 'normal people' with a steady wage, because they effectively get a good rate on their current account which does rack up over a year, and that's tax free.
It's effectively tax free instant access which is nice for any higher rate tax payer.
But a really good low rate ordinary mortgage might blow it into the weeds, you have to do the numbers for your own case, not mine or Mr Average.
Also in the long run, you need to have clue where your 'finishing line' might be.
Some people are trying to be mortgage free at 55, some want to pay the minimum interest over the next 10 years, some are aiming for retirement at 60 or something.
This made me uncomfortable about the 'rolling ISA into offset' stuff, to me it was important to arrive at 50/55 with the mortgage paid off and some investments in an ISA.
In my view there are at least 4 things to be balanced:
Property/mortgage
Pension
Other investments
Spending your money on the things you want to do.
I had an offset, it was a good deal overall and a useful part of my plan, but I'd be careful about letting it drive your overall strategy, particularly when your mortgage starts to shrink in real terms.
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