one account

Pay of whatever debt you have which charges more interest than the savings.

The subject of flexible current account mortgages crop up regularly see the uk.finance archive -

A one account does not have particularly good interest rates. The fastest way to pay it off is to get a mortgage with the lowest rates you can find which allows overpayments, and then put all your spare cash into paying it down, except that you should pay off other loans at higher rates first.

The main advantage of current account or offset mortgages is for people (e.g. self-employed) with erratic cash flows who will be constantly putting money in and taking it out. Other than that it's really just convenience, it makes life a bit easier but potentially at quite a big cost, even an 0.5% interest rate differential is 500 a year on a 100k loan.

What about the tax benefits of a flexible mortgage (i.e. you pay tax on interest /earnt/ but not on interest saved) and the benefits of having your salary save interest until it's all spent at the end of the month?

Best Regards, Alex.

The tax position is identical whether you offset a mortgage or use spare cash to pay off mortgage debt (provided the mortgage is daily interest and carries no penalty).

Unless you have lots of cash sloshing in your current or savings account that can't predictably be used to pay off mortgage debt (e.g., erratic cash flow) the slightly higher interest on most offset type accounts will eat up the advantage.

There are other minor advantages to flexibility of an offset or the possibility of capital in retaining tax-free savings accounts such as ISAs (useful once the mortgage is paid off).

Thom

I think you're missing my point.

Assume I'm making the most of all my tax-free saving options (e.g. ISAs)

If I invest 10K in a bank account, I'm likely to get ~3-4% interest at the moment, and need to pay tax in the interest earnt, reducing that 3-4% to maybe 2.5%.

If I put that 10K into a flexible/offset mortgage account, I'll /save/ interest on 10K of the mortgage loan, which a) will probably be at a rate higher than savings interest and b) won't have tax payable since the interest is saved, rather than earnt.

The difference between an offset mortgage and a traditional mortgage is that it's easy enough with an offset mortgage to get that money back out again if you need it later.

Best Regards, Alex.

I think you're missing Thom's point. If you put your 10k into an offset account, it's effectively "earning tax free interest" at the (high) loan interest rate, instead of earning taxed interest at the (low) savings rate. *BUT* you are paying a higher loan interest rate on the bulk of your loan if you place the loan into an offset account than you would in a more traditional mortgage deal.

Try some sample figures. You have savings of 10k and a mortgage loan of 80k. You're a standard rate tax payer. You can get 4% interest on your savings. That's 3.2% net of tax so you earn £320. Your mortgage loan costs you 4.5% of 80k, which is £3600. Net outflow is thus £3280 per year.

If instead you combine them in an offset account charging 4.7% interest, you don't lose the £80 tax, but you're paying more loan interest in the first place: 4.7% of 70k gives a net outflow of £3290, which is more than the previous separate account example, simply because the offset-type loan charges an interest rate 0.2% higher than an ordinary mortgage loan would.

So someone with 700 more in savings would be better off with an offset.

Yes, just. Unless they also have a slightly bigger loan.

The numbers were only an example, and I don't know whether 0.2% is a typical mark-up for offset mortgages or not. The point is that folk shouldn't let the tax-savings tail wag the interest rate dog.

It would of course be ideal if the offset trick were available without the interest rate surcharge, but so long as there is a surcharge, people need to do their sums to see whether their savings/debt ratio makes the deal worth going for.

charcolonline show Nationwide offering a CAM at 4.8% APR. Their first time buyer best buys are all at least 5% APR. Their cheapest discounted rate best buy is from One Account at 4.5% APR. OTOH, using their wizard for my circumstances gives Coventry BS as the cheapest at 4.2% APR.

For me, the appeal of an offset mortgage is the ability to place all my eggs in a fairly-well performing basket, but still leaving the option to get money back out easily if I need it due to unexpected circumstances. And without having to waste time chopping and changing accounts every few months to make sure I'm getting the best deal.

Your comments are taken on board though; if I get round to buying, I'll make sure to at least do a sanity check on offset vs. traditional + savings account.

Cheers, Alex.

Ronald perhaps you could offer this thread a formula to calculate the difference between an offset and other mortgages.

Sure thing.

You have mortgage debt D and savings S. For simplicity we assume the mortgage is interest-only.

The savings earn interest at an effective (i.e. after-tax) rate E; for standard (higher) rate taxpayers this is 0.8 (0.6) times the gross rate, which is that usually published.

The "normal" mortgage interest rate is N, and the "offset" mortgage interest rate is O.

Our mortgagor/saver with a normal mortgage and separate savings would pay out DN-SE each year, but with an offset scheme it would be (D-S)O.

For the offset scheme to be worth while, the former obviously has to be bigger than the latter.

DN-SE > DO-SO => S(O-E) > D(O-N) =>

S/D > (O-N)/(O-E) ================ In other words, the scheme is worthwhile only if your savings/debt ratio exceeds the ratio of the excess of the offset rate over the normal loan rate to the excess of the offset rate over the savings rate.

From the earlier example: S=3.2%, N=4.5%, O=4.7%:

(O-N)/(O-E) = (4.7-4.5)/(4.7-3.2) = 0.2/1.5 = 1/7.5 = 0.13333

So to be worth while, the savings would have to be at least 13.333% of the debt. With a debt of £80k the savings break-even point would be £10,667. With anything less than that, you'd be losing money.

As you pointed out, savings of £10,700 would make it viable. But how much would you save each year? Well, it's

DN-SE-(D-S)O = 80k*0.045 - 10.7k*0.032 - 69.3k*0.047

which is 50p. Amazing!

What do you mean by "easily" get it back out? There are numerous flexible mortgages which will let you withdraw overpayments about as easily as a traditional savings account, i.e. you write to them and they send you a cheque. In general those have better rates than accounts explicitly branded as offsets. Even without that you can extend nearly any mortgage loan if necessary, indeed a large fraction of loans being made at the moment are equity withdrawal. The question is what kind of circumstances you're talking about, if it's in case you have to replace the double glazing some time in the next 20 years it's different to knowing that you'll want £5k for a major holiday next year.

And quite a few "flexible mortgages" come with a cheque book - although there is often a minimum amount per cheque (often around 500 to 1000) which *may* preclude the weekly shop at Tesco. :)

OK, that's not too bad...

The main scenarios I want to allow for include:

a) being out of work for longer than covered by "rainy day" savings. b) needing a new car sooner than expected, and not wanting to take out a specific loan (probably at a rate higher than mortgage rate). c) unexpected major repairs to the house.

Best Regards, Alex.

the One Account is I believe the simplest account on the market, its just a huge overdraft secured on your house. It is free of concepts like "regular payments", "getting it back out", "asking for a cheque" and the like. It just is :-)

I am self employed and the One account works fine with a highly volatile income stream, 5 grand knee operations and new cars.

There might be an interest rate penalty, at least compared to short term offers, but the One account reliably tracks the Base Rate changes (sadly also true when the rate is rising).

Tax on savings? what's that.

Phil

Generally offset accounts like IF (and a few others that escape me) have a lower interest rate than the "one account". The offset accounts work by separating out the various components in to "pots" of money. You can pretty much set up as many as you like (e.g., current account, several savings accounts and mortgage). Some people (including me) like the idea of separating the pots this way. Even if I did prefer the "one account" way of pooling everything I doubt I'd like it enough to pay the extra mortgage interest.

Thom

yes, horses for courses. Right now IF appears to be 4.95% varaible and I'm paying 4.85% but if I was in the 50-75% LTV range it would be

Personally I can't be doing with things like "Take up to two payment holidays a year" and "Flexibility to pay more than your monthly payment" or "Make one-off payments whenever you want - plus the added flexibility to withdraw your overpayments"

it just sits there and I pay the minimum interest on the prevailing balance. I have an allergy to admin and call centres, you see.

Each to his/her own.

Phil

Depends what you mean by "minimum interest". My flexible mortgage is 0.5% above base rate, so presumably 4.25% comparing with your 4.85%. 0.6% is £600 on a £100k mortgage, which is a lot to pay to avoid call centres ...

I was referring to an account that operates in a way that without any user intervention minimises the interest paid at its prevailing rate, rather than referring to the rate per se.

which one is that ?

Phil