[Closed] Offset mortgage questions

Think it depends. A mate of mine was with virgin many years ago and it just worked like a single account so was always overdrawn to the value of his mortgage. That would drive me potty. When I was looking with my bank it was separate accounts but you got an overall summary.

We don't want a huge 'overdrawn' figure - we would like to see them separately.

I'm with Scottish widows. They show as two separate accounts, and also a total. Really like it. It's saved us s fortune.

First direct shows them as separate accounts (we had 5 accounts linked to the mortgage). Customer service has always been excellent, if you haven't already I'd check them out.

We don’t want a huge ‘overdrawn’ figure – we would like to see them separately

Same here. You want a ‘sweeper’ account then where it shows your mortgage, current and savings Accounts separately but sweeps up the interest across all and applies the net interest to all three accounts. So if you have a mortgage the. Anything you have on your savings account and current account is netted off your mortgage before interest applied. This was how the First Direct one worked when I was looking. The virgins One Account was just that, a single account. Thing the ultimate effect is the same but I need stuff to be in their nice neat little pots to gel I know what’s going on.

We had a Loods one, we just got a 3 monthly statement that showed the values of the accounts linked to the mortgage, this then detailed the amount and years the mortgage had reduced.
All values were as per the money in the accounts.

The Intelligent Finance once we had back in the day showed two separate figures.
Was pre phone app shenanigans though I did operate it easily on the website.

A mate of mine was with virgin many years ago and it just worked like a single account so was always overdrawn to the value of his mortgage

I think that was the original pitch when they first launched but quickly changed as no-one want's to think like that.

First Direct and we have a current account, savings acccount, and a mortgage. Can transfer between them and run the balances however you want but you pay mortgage interest on the balance combined.

We've got a Coventry offset. You get two different accounts, one for savings one for mortgage with them.

I don't think there is an app, the online banking website is adaptable to different devices if you are on PC or phone. It works OK, but a bit basic.

Ours is old now, but the interest rates are the same for each bit.

Step 1. Find lowest rate.
Step 2. Overpay as much as you can afford.

Step 1. Find lowest rate.
Step 2. Overpay as much as you can afford.

This is happening.

However we are also selling a buy to let after our main house re-mortgage is to go through, and on top of wanting a savings pot kept separate for buying cars and holidays.

I don't really want to spend a few months on SVR, I would rather lock into the (daft) low interest rates at the moment. The capital from the BtL sale will be paid off the main mortgage at the maximum rate each year - but the rest can sit offsetting the interest costs anyway.

It is 0.2% different between 'normal' mortgage and offset, no difference in fees either.

I will struggle to get 0.5% interest on a bank account with easy access.

This leaves a 0.3% 'cost' to offset - something I can reduce to a positive through our cash savings and the BtL capitol pot reducing mortgage interest charges.

Any thoughts on how worthwhile offset mortgages are?

I've never really been convinced.

You pay a higher interest rate on the mortgage (looks like a 0.2% difference for Coventry).
They made a certain amount of sense when you were taxed on savings interest, but now that there's a £1000/£500 allowance, I don't think that they're worthwhile.

You pay a higher interest rate on the mortgage (looks like a 0.2% difference for Coventry).

For Coventry's highest interest rates, you have to have £8k in savings for every £100k of mortgage for the offset to be cheaper. £14.4k for every £100k for their cheapest rate.

Had a santander one which showed mortgage & savings separately.

This leaves a 0.3% ‘cost’ to offset – something I can reduce to a positive through our cash savings and the BtL capitol pot reducing mortgage interest charges.

That doesn't make sense. The 0.3% cost doesn't change depending on the amount of your cash savings.

Say you've got a £100k mortgage. Normal interest rate is hypothetically 0%. Offset is 0.2%. You pay £0 for the normal mortgage, £200/year for the offset. If you've got £100k in savings, then you earn £500/year in interest for the normal mortgage/savings account, and you pay £0 / earn £0 for the offset.

My maths is stuggling...

The increase of 0.3% to an offset will cost around £400 per year in interest, for me.
Am I going to earn £400 of interest on my savings is the question.

For Coventry’s highest interest rates, you have to have £8k in savings for every £100k of mortgage for the offset to be cheaper. £14.4k for every £100k for their cheapest rate.

That now makes good sense to me, thank you.

That now makes good sense to me, thank you.

No worries - bear in mind that's just outright cheaper, it doesn't take into account what you'd earn in interest with a savings account (i.e. it's if you earn 0 interest on any savings).

For Coventry’s highest interest rates, you have to have £8k in savings for every £100k of mortgage for the offset to be cheaper. £14.4k for every £100k for their cheapest rate.

But there might be other providers who have smaller fixed rates?

The increase of 0.3% to an offset will cost around £400 per year in interest, for me.
Am I going to earn £400 of interest on my savings is the question.

No, the question is, am I going to save interest payments worth more than £400 + the interest income I would get if the cash was in an unlinked savings account.
I think 🤔

But there might be other providers who have smaller fixed rates?

It's the ratio of the difference in interest rates that matters. That's why you need more in savings for cheaper rates to make the offset "equivalent". 0.2% is a higher proportion of 1.39% than it is of 2.35%.

I don't think I've ever seen a offset mortgage that matches the interest rate of the normal one.

I'm being offered 1.19% repayment Vs 1.49% offset.

I’m being offered 1.19% repayment Vs 1.49% offset.

Need to look into this again, last time I looked the offset rates looked rubbish, far more than 0.3% difference.

I’m being offered 1.19% repayment Vs 1.49% offset.

Go on then.

So the mortgage amount is about £135k?

1.49% = £2012, 1.19% = £1607

You'd need £27181 in savings to make the offset the same price as the repayment. (£135k - £27181 = £107819. 1.49% of £107819 = £1607), but you'd still be short by the amount you'd earn in savings for the same amount (0.5% of £27181 = £136).

Offset becomes cheaper at about £41k savings.

1.49% of £135k - £41k = £1401

£1607 - (0.5% of £41k) = £1402

Thank you. That's helpful.

Really like it. It’s saved us s fortune.

How exactly?

I did a huge spreadsheet back-in-the-day when they first reared their heads, just didn't add up.

Unless your savings are a huge percentage of your mortgage, and when I did the calcs our monthly income was circa 10% of our mortgage and that still didn't make it viable (vs the standard rate offered).

We had a virgin one and seeing a big negative figure helped focus on not spending.

I have been looking at First Direct Offset Mortgages - ? Have i got this correct ?
If i take out an Offset Mortgage with them of £50,000 but have savings of £50,000 then I would not be paying them a penny in repayments each month ? I know i am not earning any interest either but how do they make money from me ?

I'm with Orangeboy on this one . We've had an offset for years which only shows how much you owe...it does focus the mind on whether or not to buy something..

but how do they make money from me ?

The £1000 mortgage fee.

Plus the vast majority owe far more than they save. Plus what's been highlighted to me on here is this figures, even with such a small percentage difference, isn't really worth it in financial gains terms.

The booking fee & arrangement fee is £0.
Yes accept that most owe more on mortgages than have in savings.
Thanks anyway.

but how do they make money from me ?

The thing is, most people don’t have much financial discipline.

Have you thought about putting any money from the BTL capital into a pension instead while mortgage rates are “low”?

We had the virgin one account, I know it's not the cheapest rate but seeing the negative balance worked for motivating us to pay it off as quickly as possible, in the end we paid the mortgage off 7 years early and I don't think that would have happened with a standard repayment mortgage.

They make money from you by having your 50K in savings to 'play' with

Have you thought about putting any money from the BTL capital into a pension instead while mortgage rates are “low”?

Presumably you could withdraw cash when you get to 55.

We have ours offset and at the moment have as much in savings as we owe (£48,000 ish).
We don't have any other savings, ISA's ect but we do have BTL's and the missus has a police pension to come.

The way it works for us, is that it makes us feel nice and safe and allows us to run old cars and vans, knowing if one dies we can just buy another one. I'm self employed so it makes paying my tax bill easy too.
We have no other debts or loans so its our safety net and alllowed us to ride out recessions and covid without extra fear. It also means that we don't have to go through the pain/cost of changing mortgages all the time.

Not everything is about interest rates.

Any extra we have now pays off a BTL.

Any thoughts on how worthwhile offset mortgages are?

They are probably worth it, certainly not going to do you any harm. Think if I were starting my mortgage journey all over again I'd have one over a conventional mortgage because people rarely get a 25 year mortgage and just pay it off over 25 years - at some point they'll want home improvements or something where they want to borrow more against their mortgage. Their benefit is probably much reduced these days given the interest rate situation currently, but the theory is that even a small percentage interest rate on a large mortgage means significant interest payments, Unless you have alot of savings then its pointless earning interest on your savings so better to use what savings you have to reduce your overall debt and therefore reduce interest payments which leads to paying off the mortgage many years earlier than you would and saving tens of thousands of pounds of interest rates over 25 years.

Interest tends to be daily calculated, so lets say you have a 100k mortgage, a couple of grand savings and on the day you get paid a couple of grand in your current account. The amount in your current account will reduce as the month goes on of course but for every day whatever you have in your current account will add to your savings and offset against your mortgage and reduce the overall capital interest charges are applied to.

So potentially significant savings over time. Look after the pennies and the pounds look after themselves and all that. So you can afford a couple of percent or so on the mortgage interest rate and still be more interest efficient than a conventional mortgage.

Also much easier to borrow money for home improvements and cars etc. as your mortgage tends to be like an overdrawn current account so no need to apply to borrow more money, within limits I guess. So have access to whatever interest rate your mortgage is at...though these days you can get deals on unsecured loans that are competitive to mortgage interest rates.

Seems odd a bank would lump the mortgage and offset account into one 'what you owe us' number, because if you put more money into the offset than is owed, do they count that as paying off the mortgage and close the account and charge the early repayment charges? Similarly when you want to take money back out of the 'total' account how do you know how much you can take (what the outstanding 'mortgage' part is)? YBS have two separate accounts and you can certainly have more in the savings than you owe, it just earns no interest. You have to explicitly pay down the mortgage each month and/or move money from the offset to the mortgage for the money to be taken off the mortgage debt (and therefore not 'recoverable').

Worth it for us in a similar position to OP (though we were moving house rather than second property) where we bought one property to move in to but knew we had months before our house sale would complete. Was easier than having two mortgages running alongside each other and better overall payments of interest over the 2-year fixed period. Then we just rearranged our mortgage again once the fixed period / early repayment fees lapsed. The detail is very case-specific so just work it out in a spreadsheet over a ~5 year period to see what different options give you.

Seems odd a bank would lump the mortgage and offset account into one ‘what you owe us’ number, because if you put more money into the offset than is owed, do they count that as paying off the mortgage and close the account and charge the early repayment charges?

Yes, if you have 100k mortgage, 2k savings, 2k in your current account then your net debt is 96k and that is what the interest is applied to saving the interest applied to 4k of your debt.

Unless you have alot of savings then no point in receiving interest on savings when you're paying alot more interest on your debt. So this is, overall, alot more interest efficient.

Of course when it comes to mortgages there is no one size fits all. The obsession on interest rates is a bit misguided...you should be more focussed on how much interest you are paying which is a function of interest rate and size of the debt plus other charges applied to the product - I've never found fixed rate mortgages to be worth it by the time you add on charges, unless you can get one with zero charges.

They make money from you by having your 50K in savings to ‘play’ with

Well they used to be able to invest it, but the law changed recently and retail deposits can't be used by the investment arms of banks. All they can do is lend that money out to other retail customers.

BANKOFENGLAND.CO.UK "https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2016/ring-fencing-what-is-it-and-how-will-it-affect-banks-and-their-customers.pdf"

If i take out an Offset Mortgage with them of £50,000 but have savings of £50,000 then I would not be paying them a penny in repayments each month ? I know i am not earning any interest either but how do they make money from me ?

You still have to make repayments but there are no interest charges on mortgage bit. Unless of course it was an interest only mortgage, but I don't think they exist in offset land.

What you can do, (and what I do) is repay the mortgage from the saving account as they are roughly at parity. There's no point in having a larger saving value than mortgage because you don't get interest on a positive balance, but I don't just want to pay it off because I still have a good chunk of cash available in a financial emergency.

I don’t just want to pay it off because I still have a good chunk of cash available in a financial emergency.

An ex colleague did this. He had a low interest rate on an offset (back in the early 2000s when rates were higher). He was able to use the pot as a cheap source of borrowing.

use the pot as a cheap source of borrowing

It has occurred to me, but because I'm old with a good credit score I can get pretty good rates on loans as it is, and I don't entirely trust myself to stick to the voluntary repayments! The house needs a new kitchen however, might be a sufficiently large 'loan' that the interest rate difference between our mortgage and unsecured would focus my mind more.

Not sure if it's still a viable option as I haven't used an offset mortgage for a long time, but back when interest rates were 6% ish I used to 'stooze' credit cards. Several credit cards all with 2-3 year 0% offers, borrow the full amount from each and offset the mortgage with it. Several years with an interest free mortgage using someone else's money made quite a difference.