Offset Mortgages

don't the sellers of these products provide such things...

for instance

Phil

Well, let's start by working out the payments. I'll assume 6%pa actually means 0.5%pm and that payments are applied monthly. So the "normal" monthly payments would be:

£150k * 0.005 / (1 - 1.005^-300) = £966.45

But the actual monthly payments are £300 more from the overpayments, plus the £150 offset interest, being 0.5% of £30k. So the effective monthly payments are £1416.45. To pay off £150k at 6% with that monthly payment will take N months where:

-N = log(1 - £150k*.005/£1416.45)/log(1.005)

Just over 151 months. But there's a complication in that the offsetting usually stops working once the debt drops to and below the savings level, so as soon as the debt reaches £30k (which happens about 22 months before the end [use the same -N formula but put in £30k instead of £150k]), you need to switch formula. All compounding virtually vanishes at this point and the £30k debt then reduces linearly by £1266.45 each month (taking 24 months to clear the balance), although in fact you also get credit interest (at a lower (and taxed) rate) on the amount by which your £30k savings exceed the outstanding debt, so that will bring the 24 months back down most of the way to 22 again, but that's a complication we may as well ignore.

Call it 152 months, then.

Or you could call it 130 months if, at the point when the debt equals the savings, you subject them to mutual annihilation. You can then rebuild your savings at £1266.45 per month at (say) 3% net which would take just over 23 months. This suggests there is no great advantage to paying off the rest at 130 months unless you don't mind not having the £30k on call for emergency shopping during those final 2 years.

Not a direct answer to your question - but this may help:

Exactly what I need. Thanks.

When thinking about offset flexible mortgage, be aware the difference between merely putting your additional money into the offset saving account and actually using the additional money to make an over-payment.

For example, if your outstanding balance is 100K and you have 10K saving. You will still pay (significantly) more total interest in the first scenario:

1] keep your regular monthly payment, and put 10K in the offsert saving account 2] make the 10K overpayment, i.e. reduce the oustaning balance to 90K

Example: Mortgage Term: 25 years Mortgage: ?50000 Savings offset against the mortgage: ?0000 Monthly overpayments: ?00 Interest Rate 6% Actual Mortgage Term:????

Thanks

"My Interest" wrote

Why do you think that?

Can you explain why it would make a difference? In both cases interest would be calculated on 90k.

I have done some calculation before (as I was on an offset mortgage). For the 1st payment period (i.e. 1st month) the net interest is the between the two approach. However the net interest will be different from 2nd payment period.

The difference between the two approaches is the 1st one will NOT reduce your principle and the 2nd approach will actually reduce your principle. If you have the formula to calculate the monthly payment, just do your homework by calculating the 1st and 2nd month payment, you will see the difference yourself.

In my case, by putting my saving as a lump sum over-payment, I haved about

50%+ life-time interest!

Remember, the best way to pay less interest is always reduce your principle faster and/or shorten your mortgage repayment years!

"My Interest" wrote

I believe you are mistaken; I have to agree with Tumbleweed on this one. Care to show any figures to back-up your assertion?

"My Interest" wrote

It doesn't need to. It reduces the balance on which the interest is calculated, which is actually what matters!

"My Interest" wrote

Offset mortgages generally allow many different "monthly payment levels", from interest-only to an amount which will "pay off the mortgage" within x years, or even a level monthly amount - but the actual level of "monthly payment" doesn't matter at all ...

You have two (or more) accounts, one "mortgage account" and one (or more) other "offset accounts". The monthly payment is simply an amount that is deducted from one of your other "offset accounts" and added (to reduce the negative balance) to the "mortgage account". Overall, you still have the same TOTAL balance!!

"My Interest" wrote

I seriously doubt that, if you really are comparing "overpaying the mortgage account" against simply leaving the "overpayment" in an offset-linked account.

"My Interest" wrote

Making "overpayments" (ie, transferring more money from another "offset-linked" account to your "mortgage account") doesn't actually affect your net principal.

"My Interest" wrote

The only way to "shorten your mortgage repayment years" is to ensure that your total NET balances (ie mortgage balance less all offset-linked amounts) drops to zero before the end of the original term. This can happen by either the actual "mortgage account" balance dropping to zero, -OR- by the "offset-linked" balances increasing up to the same (absolute) amount as the "mortgage account".

There's no difference!

I am talking about repayment mortgage (i.e. NOT interest-only mortgage) with monthly payment covers both interest and principle.

----------------------------------------------------------------- Scenario A

------------------------------------------------------------------ Assuming that the mortgage amount is 100K, annual interest 6%, and loan term is 25 years. You put 10K in the offset saving acount.

Based on these, your monthly payment will be 644.30. Monthly interest earned on your saving account is 50.

Month #1, among 644.30, interest is 500.00 and principle is 144.30. So your net interest payment is 450.00. Month #2, among 644.30, interest is 499.28 and principle is 146.30. So your net interest payment is 449.28. ...

----------------------------------------------------------------- Scenario B

------------------------------------------------------------------ Assuming you overpaid 10K and still keep the monthly payment as 644.30. (Effectively you make the loan-term to 20 years)

Month #1, among 644.30, interest is 450.00, principle is 194.30. Month #2, among 644.30, interest is 449.03, principle is 195.27 ...

It can be further demonstrated that, except the 1st month and the last month, this approach always pay less interest.

----------------------------------------------------------------- My conclusion

------------------------------------------------------------------ The trick is that for each payment, you'd like to repay as much principle as possible thus reduce your interest payment. Approach A, though offsets your interest, does not help to reduce your principle which approach B does.

Certainly, the difference for this example seems to be ignorable for the 2nd month (0.25). It does vary with all the input parameters. But the most important thing to notice is that the difference will increase substaintially for the following months and the total repayment time is also much shorter in the 2nd approach (though the difference will be less than 5 years in this case). The last two factors will cause substaintial difference for your life-time interest payment.

Remember, there is no free lunch. You need to pay for the flexibility of being able to withdraw your money from your saving account at you will!

Ahah there's your fundamental mistake! You dont earn *any* interest on a savings account with offset, its deducted from your balance:-) meaning another advantage is that there is no tax to pay on interest earned, because you dont earn any :-) Thats one of the the key points of offset. Rest of your calculations are therefore junk assuming they assume such things.

I dont know how they all work, but with mine, in such a circumstance, you have a choice to make.

1) pay whatever fixed fee it was originally calculated you should pay every month based on the initial mortgage irrespective of what the new calculated total should be (which in this case will be based on 100k mortgage and not 90k) so in effect you are overpaying and the term will be shorter; 2) pay whatever the calculated total should be (which in this case will be based on 90k mortgage and not 100k) so in effect you are keeping the term the same as originally calculated

Please note that the word is "principal". "Principle" is something else.

Agreed.

Well, not quite. No interest is earned on your savings, in return for no interest being charged on 10K of your loan.

True, you get charged 450 interest instead of being charged 500 and earning 50. But you're still making payments of 644.30, aren't you? And since only 450 of that is wasted on interest, the principal reduces by 194.30, which is the same as in your scenario B.

Indeed, but increasing your savings *also* reduces your interest payment.

Yes it does. Since your savings and loan are linked, the *effective* principal is always equal to the difference between the nominal principal (i.e. the outstanding loan balance) and the savings balance (provided this difference remains positive). The effective principal is essentially the amount which determines how much interest is charged. As you say, in month 1 this is 0.5% of (100k-10k).

There is no real benefit to reducing the nominal principal instead of the effective principal.

Sure, but the way you pay for this particular free lunch does not come from this difference which you erroneously imagine. Instead it comes from the fact that such offset-style accounts charge a slightly higher loan interest rate than ordinary loan accounts.

"My Interest" wrote

OK, let's use the above assumptions. But note that the monthly payment could actually be anything (usually needs to be in excess of the net interest payment though).

"My Interest" wrote

Effectively, you are starting Month#1 with a "mortgage a/c" balance of 100K and a "savings a/c" balance of 10K, injecting 644.30 from elsewhere, and ending Month#1 with a "mortgage a/c" balance of 99,805.70 and a "savings a/c" balance of 10K. [Note: 100K + (500-50) - 644.30 = 99,805.70.]

If you really wanted to think of the 50.00 "savings interest" as appearing in the savings a/c, then you'd be ending the month with a "mortgage a/c" balance of 99,855.70 and a "savings a/c" balance of 10,050 - overall, you're still 194.30 better off than at the start of the month (just looking at those two, mortgage and savings, a/c's).

So, as Ronald said - your principal has fallen by 194.30.

"My Interest" wrote

Oh dear! This is where you are going wrong.

As we know from above, the previous month ended with a "mortgage a/c" balance of 99,805.70. Hence this month's interest will be 499.03 (less the

50.00 from offset savings giving 449.03).

So - this month, you are starting Month#2 with a "mortgage a/c" balance of

99,805.70 and a "savings a/c" balance of 10K, injecting 644.30 from elsewhere, and ending Month#2 with a "mortgage a/c" balance of 99,805.70 and a "savings a/c" balance of 10K. [Note: 99,805.70 + (499.03-50) - 644.30 = 99,610.43.] [Alternatively, if your mortgage a/c ended the previous month on 99,855.70 and the savings a/c ended on 10,050, then interest would be 499.28 offset by 50.25 giving 449.03.]

Actual principal paid this month: = 644.30 - 499.03 + 50 = 644.30 - 499.28 + 50.25 = 195.27.

"My Interest" wrote

Yep, that's right. But it's exactly the same as "Scenario A"!!

"My Interest" wrote

... is therefore incorrect!

"My Interest" wrote

Many offset mortgages will allow you to "borrow back" any overpayments, just as easily as "dipping into" your savings a/c....

I don't think this alternative is legally possible. They cannot pay the savings interest tax-free. That's why it's necessary to use the ploy of forfeiting credit interest in return for being forgiven debit interest. That way, since no interest is being earned, no income tax is charged thereon.

So I guess the only way the savings a/c balance could grow by 50.00 is if he were somehow to withdraw this sum from the loan a/c, or if he were to divert 50.00 into savings from his injection of 644.30, thus paying only 594.30 into the loan a/c.

The overall result, of course, as we've said before, would be the same.

"Ronald Raygun" wrote

Yep - that's why I said "If you really wanted to *think* of the 50.00 ..." !

"Ronald Raygun" wrote

That's the way I was thinking.

"Ronald Raygun" wrote

Agreed, exactly.

[]

I really don't see the attraction of offset accounts over daily-calculated current-account mortgages.

OK, CAMs[0] do have the slightly higher rate[0], but *every* deposit effectively reduces the principal instantly, and you have no concept of 'monthly payments', just the monthly interest that is charged.

rgds, Alan [0] Or as I prefer to call 'em "Fscking Big Overdrafts" ;-) [1] Gross up the debit interest at your tax rate to find the saving/investment rate you need to earn for it to be a better bet than reducing the mortgage debt.

"Alan Frame" wrote

Eh? A current-account mortgage is just one particular (rather restricted) type of offset mortgage, isn't it?

You can simply have your current account(s) offsetting the mortgage a/c, as well as any savings account(s). This is even better than the ones which you seem to be talking about, where you have just one account with a jolly big overdraft - because you still get every deposit reducing the principal immediately, but you can hold different balances in the mortgage a/c, current a/c(s) and savings a/c(s)...

How is it restricted?

But it all boils down to the same thing. An overall debt to the bank - where every deposit reduces that debt and every withdrawal & interest charge increases it. Just with offsets the bank presents it to you differently, as separate pots.

And there is one significant advantage to current account mortgages. Should you lose your job and need to claim means tested benefits - you can truthfully tell the DWP that you have no savings, because all you've got is one massive overdraft! With offsets, I think the DWP would view the accounts as separate as that's the way the bank presents them - so anything in a "savings" account could disqualify you from means tested benefits.

I'd say it's the other way round - an offset mortgage is a more complicated form of a CAM for folks that need reminding of how to calculate *net* worth (no offense ;-).

True, but as you said, it's the the /aggragate/ balance that counts - with a CAM, that's all there is, there are no pretend balances, the term is effectively floating, the repayment element is transparent[0], and the OPs question doesn't arise 'cos there is no overpayment - to reduce the debt, term and total interest one 'simply' (Ha!) spends less than one earns... q.v. D. Copperfield...

I'd rather see that I've got 5 beans, than think that I've got 7 , but you owe me 1 and I owe someone else 3, IYSWIM.

I can see how your view might be convenient if the total (mortgage,cash savings) balance is close to zero, or positive, but that's a whole different kettle of worms.

rgds, Alan [0] repayment = ABS(last month balance - this month balance), if that's zero, then you're effectively on interest-only; if it's negative, you've just remortgaged, without fee and at a better rate than most loans.