Come and talk to me about offset mortgages

[fridayschild]

I am buying a new house, I hope. The mortgage adviser is keen on offset mortgages and in principle I can see why they would be a good thing.

However I am deeply suspicious of clever financial ideas and I rather feel that this is a good approach: I have not taken out an endowment mortgage, for example, or put money into an Icelandic bank, when that was all the rage.

Can anyone explain to me the downside of an offset mortgage? I feel sure there must be one.

I have an offset and I love love love it. It's NOT like an endowment or anything of that kind - basically the idea is that you give up any interest on your savings, and in return you aren't charged any on that part of your mortgage.

So instead of getting +3% interest on your savings with bank account A and -3% interest on mortgage account B, the bank does the sensible thing and just cancels the two out, so you only get charged interest on the balance.

If you have savings they are an excellent way to cut your mortgage bill or term, and if you are a higher rate tax payer they are extremely efficient because you would normally be paying 40% tax on your interest.

Our offset is completely no strings attached and we can overpay by any amount and leave at any time - which I would recommend if you can still find one under these terms.

The one thing to be wary of IMO; you are usually offered the choice between using your offset to cut your payments, or you can maintain the same level of payments and pay the loan off faster. I would be wary of choosing to cut your payments because it means if you have a change of circumstances and need to use your savings, you also suddenly find your repayments have to go up which is a bad combination. I think it can encourage people to spend during the good times and then find they have less of a nest egg during the bad times. If you do choose to lower your payments, I would always try to divert the difference into your savings account rather than spending it, so it's there when you need it.

I'm not a financial bod at all by the way - I work in media and have no axe to grind!

You may have a hirer interest rate

there maybe a clause of how much you can actually offset

you may come to want to keep a mortage at a low amount say £5000 and the mortgage comapny want you to pay it all off or borrow more -they don't like small mortgages

those are three things I would ask about

Oh, the other downside is if you have huge amounts of savings, it obviously encourages you to sink them with the same bank, however you are only protected up to "50,000 under the government guarantee.

I am not sure what the legal position would be if the bank went under, whether your lost savings would be cancelled off your remaining debt, or whether they would be treated as separate accounts and you could potentially lose your savings but still owe the mortgage. Maybe worth asking your financial advisor about this?

Obviously this is only a concern if you have above the government protected amount of savings (we don't, unfortunately!)

You don't get the offset on the whole amount (assuming you have a repayment and are overpaying the balance to pay off at the end of the term).

With the rates accounts are offering right now, you may as well offset it and chip off the morgage.

Thanks, to both of you.

I was wondering how it would work if I got into trouble with the repayments - is it easier for the mortgage company to help itself to my savings? If I was in dire financial straits I might need to do something else with them (repay credit cards or something, not sure what) as well as keep my mortgage on track.

X-posted with Ivy. Those are good points. Our offset allows us to offset any amount, we can even be in net credit and receive interest on the credit if we wish.

However we got our deal about 3 years ago and I have no idea whether these terms are still available.

You also need to consider whether you want a fixed offset or a tracker and which terms are available for each.

As far as I know, no they cannot help themselves to your savings. The savings are completely separate to the mortgage in the sense that you can empty the savings account at any time, and they will not take the amount of offset savings into account when calculating the affordability of the mortgage.

However double-check this with your financial advisor in case there are exceptions with some deals.

In a true offset the savings are separate but some accounts (like the ONEaccount) keep them all together. I'd find that most confusing so would always go for a proper offset.

I love ours - but yes be aware that the rate may be higher and if so you need a decent amount of savings to make it worthwhile.

If you think that there's a chance you might get into trouble with repayments, I'd say an offset plan is not for you - as someone said upthread the interest is likely to be a bit higher so it's only worth it if you are planning to build up significant savings to offset the mortgage amount. If you had credit card debt you would naturally pay that off instead of saving 3% interest on your mortgage.

In ours, and I think this is standard, there is a savings account linked to the mortgage. The mortgage company will collect your monthly repayments from the savings account although you can probably alter the amount to some extend, for example by paying interest only. You can take the money out but if it's in the account yes, they will take the payments you owe out of it.

"In ours, and I think this is standard, there is a savings account linked to the mortgage. The mortgage company will collect your monthly repayments from the savings account although you can probably alter the amount to some extend, for example by paying interest only. You can take the money out but if it's in the account yes, they will take the payments you owe out of it."

Ours is not like this. We make the payments out of a separate account (held with another bank) and they have no direct debit mandate over the account linked to the offset.

I don't think they would have any legal right to touch the money in our savings account, even if we got into trouble with payments. (Check with your financial advisor though, as I imagine some companies may differ in their policy and may require you to use the offset account)

However in practice, as others have said, I would drain our savings dry before defaulting on the mortgage because the late payments and additional interest would far outweigh any advantage in having savings.

Also I agree that if you have other debts then an offset is fairly pointless - you are almost always better off paying off your higher interest debts, rather than hoarding savings linked to a low interest mortgage.

Offsets are most useful to - 40% tax payers (because you are essentially avoiding paying tax on your savings), people who expect to get lump sums once in a while (bonuses, proceeds from share options), and those likely to overpay often.

Why would a mortgage company help itself to your savings?

For regular taxpayers a normal mortgage account (I truly believe in trackers) would be fine and a regular savings account would probably offer better savings rate.

Thanks again. I am a lawyer and so I read the small print on mortgages... Our current repayment mortgage from the C&G does say if we get into trouble they can take money from any other account we have with a company in the C&G group ie including Lloyds, where we have a joint account. This is actually a pretty standard term in all loans and mortgages as far as I know. I suppose the only reason this causes me extra concern with an offset is that I assumed the savings would also need to be with the same bank, and therefore it's easier from them to help themselves.

Obviously they only use it when you go into default, and I'm not planning to do that

We have an offset and my DH is self-employed. It's brilliant cos he saves up all year for his tax bill and rather than paying interest on that before it goes to the tax man, it offsets the mortgage. He is a higher rate tax payer so it saves us even more. All our accounts are linked to it, and he has high income and outgoing for work and its great not to have to think about whather the cash is in the "right" account for interest - all the accounts offset so they are all the same IYSWIM.
U was dubious too at first - it seemed too good to be true, but for us its great.

I not U