[Closed] Offset mortgages

Why not throw a lump sum at your existing mortgage, lower repayments and save the difference again.

You can always draw down if you need a lump sum ?

IANAFA

Biggest risk is they can be withdrawn at short notice (depends on exact terms) I had one which I was asked to refinance after the bank withdrew from the market also if you don't make an effort to pay down the mortgage.

They work best at higher interest rates IMHO as there is a tax saving too (no tax to pay on interest received)

[i]Are there any catches or pitfalls with offset mortgages that I need to be aware of?[/i]

When I looked at them years ago the extra interest they charged negated the benefits (I created a 25 year monthly spreadsheet one long flight to prove what I'd estimated).

Not sure if they are still the same.

We've got one with the Coventry Building Society. Seems pretty good, there's no extra charges for over paying, even if that means you finish early and the set up charges were reasonable.

As Jambalaya says, due to the low interest rates, the offset isn't making a great difference, overpaying is more effective for reducing the value.

I'd be looking at a Santander 123 account ( we have 2 soon to be 3)

When I looked at them years ago the extra interest they charged negated the benefits (I created a 25 year monthly spreadsheet one long flight to prove what I'd estimated).

I found this too, complete with aid of a spreadsheet 🙂

You should also check the flexibility of a non-offset mortgage: on my mortgage I can overpay, but in the future can take a payment holiday up to the value of what I've overpaid.

Worth noting that part of the benefit of offsetting is tax: you get taxed on savings, but don't get tax relief on mortgage interest. If your savings are already in an ISA, then that's negated (although ISA rates are rubbish...)

Have had one with Yorks BS for last 2 years - they offer a huge range at very good rates.

Very useful as you say to save but withdraw savings in future and can either pay mortgage off early or annually reduce mortgage payment to pay off over term.

If a higher rate tax payer means you effectively earn a fair wack on savings (offset) - less benefit to lower rate taxpayer but still better than savings rates. YBS offset rates often close to non offset rates from other banks/build socs.

As above stick it in a Santander 123 account and earn £40 a month.

When I had one interest rate was "base rate flat" my colleague got "base rate minus 0.5%" so rates need not be high. Those days are long gone but check what's on offer

My offset tracker worked well for me - Woolwich/Barclays 0.49% above BR. I did build up cash ISAs though as well but I've switched all these to investment ISAs so worked out nicely.

My offset mortgage spreadsheet:

https://docs.google.com/spreadsheets/d/1cLH5NU8s4ghbiB7wlc_a1obAcjXdY59TZuW5jhStqjc/edit?usp=sharing

My offset mortgage spreadsheet

Much obliged for that, thanks! 🙂

It confirms what I found by playing with some on-line calculators (prompted by some of the comments above).

I really didn't want to throw "our money" (which is partly windfalls, as well as regular savings) into what I felt was the bottomless pit of the mortgage ("Our money" is ours to spend if/when we wish/need to, without having to apply for payment holidays, etc. etc...Daft, I know)

[u]However[/u], it turns out I had grossly under-estimated (guessed) the effect that a lump sum would have on the mortgage term - with a bit of overpayment, we could pretty much have it paid off (or nearly so) before #2 is ready for uni. (There is about 10 years left to pay if we do nothing).

An offset could put us in a somewhat similar position, with the reassurance of having the savings to draw on, but the prospect of having the end of the mortgage in sight makes that seem less important.

Plenty of food for thought.

Thanks for making me do my sums! 😳

I just have a plain overpayable mortgage with no limit overpayments (after the initial fixed period, before that it was limited to £500 a month). Half way into the mortgage and it's paid off. The overpayments vastly reduce the total to pay, the term and the interest charged drops rapidly. In my case the overayments are there as an emergency fund I can borrow back on if I needed to.

I have exactly the same as deadkenney. I just make over-payments into the mortgage and I can borrow back against that if I ever want to, so long as I stay ahead of the agree payments. It's only if I fall behind that I have to apply for a mortgage 'holiday'.
Personally, I would pay it into the mortgage if you can, as you have to pay that so it's a guaranteed rate.

jambalaya - Member

Biggest risk is they can be withdrawn at short notice (depends on exact terms) I had one which I was asked to refinance after the bank withdrew from the market also if you don't make an effort to pay down the mortgage

Was that RBS or one of their subsidiaries? In the depths of the credit crunch, they tried that with me, or rather they tried to get me to lower the amount I could draw-down, but since these funds were contractually mine - overpayments - I asked what reciprocal benefit they would offer for lowering their risk, would there be a reduction in interest rate? The woman on the other end of the line went quiet and said "no", to which I replied "well then why would I agree to it? The cash is mine and it's there for a rainy day."

For the OP, offset works well for those who are disciplined with money. The fact you [i]already[/i] have savings tends to indicate you'd fall into that camp.

You can get 2.4% interest on an ISA. Is you mortgage much higher than that to be worth the hassle and fees?

I have the Barclays one as well.

It offsets your current account but also other 'saving' accounts so every month I stick a amount into the savings account, removing it from the current account, and try to make it to the end of the month without having to transfer some of it back to the current account.

Having less in the current account make me feel more skint, so I watch the spending more - although the net effect on the interest is the same.

Using the barclays mobile app means that I can see the accounts and the totals regularly and gives that goal of trying to build up the savings account.

Disrupts my old method of saving which was to not check the accounts until the end of the month, then I never knew whether I was flush or not, and so didn't spend... At payday I would then see what was left over from last month, and put it in the savings account.

If you are going the offset mortgage route and you're doing tax returns then don't forget to declare the interest that you have had offset. One of HMRC's favourites for querying a return.

When we looked earlier this year it appeared that offsets are treated in a similar way to interest only. This could mean that the affordability checks are harder to pass. Rates didn't seem very attractive either compared to best buy repayment options and savings accounts (admittedly without 1/3 saving to loan).

If you are going the offset mortgage route and you're doing tax returns then don't forget to declare the interest that you have had offset. One of HMRC's favourites for querying a return.

Please clarify what you mean here - I don't follow you at all.

Please clarify what you mean here - I don't follow you at all.

I think he is talking rubbish...

[i]I think he is talking rubbish... [/i]

I thought it was just me that was confused. Thought he may have been referring to buy to let or something.