Offset Mortgage Info Required Offset Mortgage Info Required
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  1. #1

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    Default Offset Mortgage Info Required

    Some thoughts and opinions required on offset mortgages as I've never had a mortgage , in fact I've never owed any one a penny in my life

    I've always rented but I'm now finally thinking of making a house purchase. I've probably got enough to pay for the type of property I'm interested in cash however I've done a little bit of reading up on offset mortgages. I'm wondering if I would be better taking out an offset mortgage and in effect covering it with 100% of the value of the mortgage in the offset account. The money I have saved away at the moment, even though in the best current and notice accounts would be better off sitting in an offset account because I think in effect it would be earning more interest paying off the mortgage. I believe that at the end of the mortgage the cash is still available in the offset account as long as I haven't touched it ?

    Anyway thought's would be welcome ?

    Also is it possible to make over payments on an offset mortgage and how does that work ?

    Thanks

    Steve
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  2. #2

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    Gonzo is a permanent contractor

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    I think you are confused.

    If you have a mortgage then that is a debt which the bank will charge interest on. If you have savings then the bank will pay interest on that, but you pay tax on that interest.

    The offset mortgage is great for people that have both debt and savings because it is more tax efficient to reduce the interest that the bank charges than it is to receive interest on the savings and then pay tax on that.

    If you don't need the debt in the first place then why bother?

    If you do it then you will have an easy line of credit on tap though and that suits some people but it doesn't sound to me like something that you would want.

    DISCLAIMER: I am not a financial adviser and it would be illegal for me to charge you for this advice. The value of your investment and the income from it can go up as well as down. etc etc

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    You mention that you have the cash to buy a property outright. Then it's a no brainer isn't it.

    Let's say you have £250k. You could put down 20% deposit on a 25 year interest only offset mortgage. You then put £200k into your offset account. Net net you pay nothing each month. The only costs are the initial loan.

    The trick is, what the cost of the offset. Let's assume you get a rate of 3.5% per year. So if you can invest your £200k at a higher rate
    than in theory you're making money from your mortgage. If you and your partner can move £10k a year into an ISA you'll make £150 per year on each chunk moved.

    As I said, mathematically a no brainer. All depends if you plan to use that £200k
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    Quote Originally Posted by MarillionFan View Post
    You mention that you have the cash to buy a property outright. Then it's a no brainer isn't it.

    Let's say you have £250k. You could put down 20% deposit on a 25 year interest only offset mortgage. You then put £200k into your offset account. Net net you pay nothing each month. The only costs are the initial loan.
    The Natwest offset I looked at you would be paying every month the same amount regardless of what you were offsetting. The difference is that it would be pure repayment and zero interest. Even if you pay lump sumps off you still pay the same each month, this was something I questioned my bank manager about. His view was that its designed to pay off as quickly as possible.

    Other bank may vary.

  5. #5

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    As Gonzo said, I think you may be a little confused?

    Fiscally, having a mortgage fully offset or buying outright is going to be the same in interest costs, received or paid.

    The advantage of having the offset facility fully offset is easy access to cash in the future. However set against that the interest rates on offset mortgages tend to be slightly higher than the best discounted rates, suggesting if you know you will need to draw the cash for other things a conventional mortgage may be better longer term.

    As escapeUK says there is still a monthly payment to make.

    I have had a offset mortgage for some years and am now fully offset - the balance in a deposit account exactly equalling the mortgage, and a small transfer each month for the repayment. I've left it like that rather than fully repaying the mortgage in case we need the cash at some stage in the future, although it would be last resort.

    Final note of caution, if the balance on your linked savings accounts exceeds the offset loan, banks - at least Barclays don't - don't pay credit interest. So you need a non linked savings account as well to drop any excess in.

  6. #6

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    Assuming you really want a mortgage.

    Unless you are getting better interest rate after tax on your savings than your mortgage interest payments (which you pay tax on), you are better off just getting a simple overdraft, which you use as your bank account.

    Virgin do one and I'm sure there must be others. You haven't got to worry about anything like offset transfers and all that palaver.

  7. #7

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    Thanks for the replies fella's.

    Yes I may be getting a little confused, mortgages and lending in general is totally new to me.

    I was thinking about an offset mortgage because that would give me the option to still get hold of my money if needed. If I pay for the property outright then in my mind the money is gone, its now bricks.

    At the moment the most I seem to be able to get on my money (instant access or short notice) is little more than 3% minus the tax. I could probably get a normal mortgage for less than this if I dig around enough so I can see the argument for having a normal mortgage and just using the interest off my cash to pay for it. The only slight issue I have with this is that I am now struggling with managing the saving accounts I have, they are all reducing the % come renewal time and even following the FSA page giving information about who owns each bank/B&B there aren't actually that many so the 80K limit becomes a problem. In short it's all becoming a major hassle.

    I need to have a good think about all of this that has become obvious.

    Thanks

    Steve
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  8. #8

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    Quote Originally Posted by swebb View Post

    I need to have a good think about all of this that has become obvious.

    Thanks

    Steve
    I think you need to speak to a financial advisor as well.....
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  9. #9

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    WNLS.

    I had a specific issue I needed to get sorted once - wanting to buy one house before I sold the previous. Went to see an independent advisor - a proper one not one tied to specific products. He advised us to get an offset - which worked out well - bought the new house with minimal deposit on offset. Once we had done the decorating and moved in, sold the old one, and transferred the equity into the offset. Any non offset product would have horrendous early repayment figures. So you could do both.

    You might find offsets are usually more expensive than a standard mortgage though i.e the % rate is higher, so you'd be best having a small traditional repayment mortgage and keep a few 10's of thousands in a rainy day fund. If you have anything over 50% Loan to Value you'll get the best rates possible as you are such a low risk.

    It sounds like you need to do some number crunching with spreadsheets to work out what you'll have in your accounts in 5/10/20/25 years if you do the offset VS paying for the house and then start saving from scratch and then look at that compared to having a standard mortgage. My spreadsheet had all the initial costs of the mortgage, the monthly payments and any final payments. You can then work out the total cost of the mortgage over the term. And see how that compares across different products. Don't forget you'll lose a lot in fees - which won't be there if you pay cash for a place. And then start saving.


    I looked at offsets this time around but the maths didn't work out - it ended up about £30 a month more on a loan of £150k. And 10 years from now - the saving / debt situation situation was better with a normal repayment which ever way I chopped it up on initial and monthly payments. I came to the conclusion offsets are only really useful to a select few and not the great money saver we all think. If you can find one with a low % rate it might work out.

    Lastly - if you have that much saved have you considered self build? Self build - as in you specify it, not actually build it. You can buy a plot of land just below the stamp duty threshold, then get something new built and reclaim all the VAT at the end. (keep the receipts). Say if you have £250k, spend £125k on the land, £125k on the house - you'll end up with a house worth about £300-£350k. Or more. It doesn't have to be a grand design, something with 4 walls and a nice internal floor layout from one of the package companies will have a fixed cost. Have a look at Custom architecture home plans, timber frame homes and more... for the sort of thing you can get as a package. Declaration - I have no ties with them, just I know they've been around for many many years and have a lot of designs that appeal to UK buyers. I think they give indicative costs of around £1000/m2 of floor area. But that can vary a bit, but useful as a rule of thumb. The best way to get a plot is find a house with spare land at the side/rear, and then split the plot - which is what I've done ;-). Just don't mention what you are intending to do whilst viewing!
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  10. #10

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    Quote Originally Posted by swebb View Post
    If I pay for the property outright then in my mind the money is gone, its now bricks.
    No you can always take out a loan out later.

    How Do You Release Equity in a House that the Mortgage Has Been Paid Off?
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