I've just opened a First Direct SmartMortgage, which is their offset mortgage, with an interest rate of 4.5% (4.6% APR).
I have some funds put away in a Smile cash mini ISA, currently paying 4%. I'm considering whether to transfer the lot into my First Direct savings account, offsetting against the mortgage, meaning that I will get a lower effective charge on interest.
It seems like a no-brainer, as it seems like I'll be instantly better off. However, I can't help but stop to think whether I should be transferring this, as it's an ISA that's taken me four years to build up, consdering the tax allowances every year. If it transfer it out now then it will take time to build up again. However, I was building it up for this very purpose!
Your help would be appreciated, if just to confirm that I'm being silly in not transferring the monies.
It isn't answering your question (sri) but I'm considering a Smartmortgage with them too (I bank with them). What are the advantages of this type of mortgage, as you see it? If you didn;t have any savings, would you have discounted the thought of using this type of mortgage?
By the way, I also have an ISA so I'm keen thaty someone answers your question too! :-)
The last sentence of your last paragraph is the clincher. In a sense withdrawing from a cash ISA doesn't just lose you credit interest each year on the amount withdrawn, but it also loses you *forever* the difference between what you get from an ISA and from a more conventional savings vehicle. So *in general* there can be good reason to hesitate.
But if the purpose of saving was to help pay off the mortgage, then if the mortgage costs more per pound than the savings vehicle delivers, then it is indeed a no-brainer (provided it is not the case that, as I once foolishly thought, being unfamiliar with all this weird new-speak, that something being a no-brainer means that it is a brainless thing to do).
As it happens, I also have some dosh in a mini cash ISA (Safeway, by the way - 4.2% - recently transferred from smile) but my situation is complicated by my mortgages being BTL ones, currently costing me
4.84% but about to go up to 5.09% as I move to a lower discount band [into year 3 of a 3-year stepped discount deal 1.00/0.75/0.50% so the SVR is 5.59% (originally Legal & General now administered by Northern Rock)]. The point is that were I to draw (say) £10k from the ISA and pay it off one of the loans, then I would lose £420 ISA interest but pay £484 less loan interest. But then £484 more rental income would be taxed, so I'd lose a further £106 - a net loss of £42. After the imminent transition, I'd still lose £420 but would gain £509 and then lose another £112, still a net loss but only of £23.
If the latest base rate cut makes it through to both interest rates, then the ISA would pay £395 less and the loan will cost £484 less and the rent tax would be £106 more. Net result: Still a £17 loss, so I'm sticking with the ISA for now.
Next year, when the loan rate increases 0.5%, the picture reverses to giving a £16 gain, but that may not be spectacular enough to get me off my butt to do something about it.
Especially since circumstances might change thereafter ... FWIW I have kept my Nationwide TOISA, it was paying 4.2% before the last rate change compared with
4.25% on the mortgage, so hardly significant and I'd rather keep the account since I can't get the allowance back.
lol! - it's heartening to hear that someone else thought that as well. I try to avoid using the phrase (that and it being an Americanism). It's hardly the most lucid piece of communication, is it ?
This is irrelevant with First Direct Offset mortgages. There are no tie-ins or redemption penalties so if you find a better deal you can re-mortgage immediately.
In addition, with FD, if your savings match your mortgage amount you pay no interest and are not required to pay monthly repayments!
Nope. It (the question of whether a mortgage is gotten or given) is relevant to all mortgages and irrelevant to none. The point I was emphasising is that it is the borrower who
*gives* the mortgage and *gets* the loan, and it's the lender who *gives* the loan and *gets* the mortgage.
Sorry, I responded to the wrong post in the thread. I meant to respond to Stephen's point:
"The other point is that 4.5% is not necessarily a great mortgage rate anyway, you can probably get a flexible mortgage at about 4% (after the latest rate cut) with no ties or somewhat less if you take some kind of redemption penalty. Shaving 0.5% or more off your total mortgage is probably a lot more significant (£50 a month on £120k), but of course if you only just got the mortgage you probably don't want to hear that!"
Stephen appeared to be suggesting that if the original poster had only just got a flexible mortgage, then he probably did not want to hear that he could change mortgage to a better rate and save money (presumably due to redemption penalties"
I was trying to point out that a truly flexible mortgage (such as the Offset offered by First Direct) has no redemption penalties, so can easily be changed to a better deal.
Surely the deal is that *the smaller of* savings balance and loan balance is in effect subtracted from both for interest purposes, so the deal is that in return for you agreeing not to receive interest on *that part of* (as opposed to all) your savings, you pay no interest on that part of your loan.
Of course in the vast majority of cases the savings balance will be less than the loan balance and therefore there is no actual difference between "that part of your savings" and "all of your savings". In any case, if the savings balance *did* exceed the loan balance, and if the rules were as you say, you could easily get round them, not only by paying off the loan, but also (if you didn't want to do that) by withdrawing the excess savings and shoving them into a non-linked account.
The real advantage of linking is that in effect you are earning interest on your savings at the (high) loan interest rate instead of the (low) savings interest rate, and tax-free to boot, so the downside is merely that once savings exceed loan you no longer earn interest at the high an tax free rate but at the low and taxed rate. In effect the situation is reversed so that in effect you'd be paying loan interest at the savings rate, which is also not bad.
and their smartmortgage does not appear to offer this facility.
Surely you would be winning twice here - interest on your ISA, and ISA amount counting towards offsetting your mortgage. How can this be? All FD linked savings accounts bear no interest?
Believe me, it is in the small-print with FirstDirect. I had to read it a couple of times to convince myself that they were actually saying that!
Nope - the "deal" is that: (a) any savings (up to mortgage amount!) offset the mortgage balance when calculating mortgage interest; (b) you get *no interest* on *any* of your savings (well, just the savings accounts that you have specifically "linked" to the mortgage).
Agreed - so (I guess) people will accept this when they start the mortgage (and probably then forget later when their savings grow towards the mortgage amount - if they ever noticed it in the small print!).
...which they are... :-(
Agreed - you can even keep one/more "non-linked" accounts with FirstDirect, which won't offset the mortgage but which you can fairly quickly/easily transfer any excess into. Problem is, you need to: (a) remember to do it when the time comes; and (b) then continually "sweep up" the correct amount of excess regularly - and one reason you may have used an offset mortgage in the first place, is to stop the need for this constant intervention!
Smile have just dropped this down to 3.75%, making it a 0.75% differential. (The 4.5% rate from FirstDirect is after the interest rate drop).
I liked the idea of being able to simplify my finances by having them all together, so that I no longer had to micro-manage funds between all my different accounts. Also, I like the idea of offsetting, but being able to get those funds back from the savings account and not the mortgage, but still helping to lower my mortgage interest repayments and therefore allowing me to pay off the mortgage quicker.
So far, I've been pleased with First Direct. I've only been with them now about three weeks, so am still getting to grips with the way everything works and transferring over standing orders/direct debits, etc, so haven't fully seen everything working normally yet. Give it a couple of months and I'll be able to say how well it's been working.
However, why did I go this way? I was attracted by the idea behind linking accounts together, getting savings effectively tax-free and at the higher mortgage rate offsetting against the mortgage. I just like the idea of not paying money into the mortgage and then having problems getting it again if needed. As I see it, a way to simplify my finances and earn beneficial rates of interest on all savings by reduced mortgage interest payments and therefore allowing me to pay off the mortgage as quickly as possible.
There's loads on their website about the product. Hope this helps.
That's the reason that I have hesitated up until now.
Which is how I'm seeing it now.
[...snipped about BTL mortgages...]
Interesting seeing things from a different perspective, how with BTL mortgages the figures can suddenly look different when the dreaded tax man comes into play.
Maybe I wasn't clear/I misunderstood. When off-setting you don't get interest in your accounts, the interest merely reduces you outstanding mortgage balance. The advantage is that if the mortgage is paid off you retain your ISA allowance (as the original capital is still in the ISA). You can elect to receive the interest in place off off-setting (in which case you get their ISA rate on ISAs).
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