≡ Menu

How an offset mortgage can help you achieve financial freedom

How an offset mortgage can help you achieve financial freedom post image

This article on using an offset mortgage comes courtesy of Planalyst from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

Paying for a home versus investing is a hot topic for the FIRE1 masses.

However I was late to this party.

I had already plunged in with the societal expectation that everyone starting a family should buy a ‘proper’ house. So that’s what I’d done.

And with that came a mortgage.

Laying the foundations

When I bought my first home in 2008, I hadn’t heard of the FIRE movement. I’d not even considered I might not keep working until State Pension age.

But I still wanted my mortgage debt paid off as soon as humanly possible.

Like most people who go down the home ownership route, my mortgage is the biggest liability I intend to incur in my lifetime.

(I’m aware that the Student Loan is a hefty debt for many graduates these days – including me. But I have less control or choice over its enforced repayment from my salary.)

My ideal was that once the mortgage was repaid I could focus on saving what had previously been mortgage payments into retirement savings.

A few years ago me and Mr Planalyst had created a whopping great budget spreadsheet. We now used this to plan how to pay off the mortgage faster.

Everyone should planalyse as often as possible in my (Excel work)book!

Discovering the offset mortgage

We chose a classic fixed interest-rate mortgage product, rather than a variable rate mortgage.

The fixed rate ensured efficient monthly budgeting. It also protected us against interest rates increasing again. They haven’t actually done so since the financial crash – but, as with most things, we only know that now with hindsight.

Anyway, when it came to the end of our fixed term five years ago, I looked around on comparison websites, intending to remortgage to another fixed interest-rate deal.

It was at this point the offset mortgage option piqued my interest.

And I’m glad I did my research, because it has proved its worth.

Offset mortgage, you say?

I’m going to assume you’re familiar with the concept of a mortgage, be it a fixed or variable interest-rate. However you may not be as well-acquainted with the offset options out there.

An offset mortgage enables you to ‘offset’ the balance of your outstanding mortgage with a cash balance held in a linked savings account.

Your monthly interest calculation is then based on the overall debt across these two accounts, rather than just your mortgage borrowings. The monthly payment to your mortgage company will therefore be lower than if you just had a normal mortgage product. That’s so long as you hold cash in the linked account, of course.

There are also a few options at the policy anniversary when the interest and mortgage capital balance are recalculated. You can reduce the term length or reduce the monthly payment or it’s possible to keep the same monthly amount and term as with a usual mortgage, in order to pay your debt off faster. This was what we did.

Sadly, you don’t earn any interest on the linked cash account (so it suffers from inflation risk).

However you’ll pay less loan interest instead. This saving should make up for what you could otherwise have earned on your cash.

Offset mortgage mathematics

The maths in favour of an offset mortgage works because your mortgage will usually have a higher interest rate than any cash savings account you’ll see in the wild.

The rates touted by offset mortgages are as low as 1.39% right now. That’s cheap, but it’s still higher than you’ll earn on a cash savings account.

Getting a return on your cash by reducing your debt repayments rather than earning interest also means taxpayers can store higher cash amounts without the risk of HMRC wanting its piece. This makes an offset mortgage very tax-efficient.

Even taking into account the small bit of interest I’d earn if the cash were held in a deposit account elsewhere, I’m paying less interest owed on the mortgage versus capital repayments each month. This means I’m eating away at the outstanding capital debt much faster than with my previous conventional mortgages.

It’s all clearly visible on my mortgage calculation spreadsheet, with its nicely downward sloping lines:

The joy of an offset mortgage: click to enlarge the advantages.

Note that the slope gets steeper the more that is added to the offset savings. That is very satisfying.

Offset with benefits

Committing surplus cash to the mortgage was all well and good in the early days of our indebtedness. Our goal of financial independence only materialised years later, and with it the need to accumulate wealth.

Nowadays I have a family, too. So I had to balance those responsibilities and my new FIRE ambitions with my desire to repay the mortgage quickly.

I therefore mentally earmarked my offset mortgage’s linked cash account as an all-important accessible emergency buffer.

The linked cash account can also offer quick access to cash for less devastating events. Maybe you’re a stockpicking type who has been waiting for the right moment to invest in a company you’ve followed for years? A dip in a firm’s fortunes can be your opportunity when you’ve cash to hand via an offset mortgage.

In the meantime and whatever it’s earmarked for, your cash is working to reduce your debts rather than earning diddly squat in a deposit account.

Paying off your debt

Emergencies and opportunities aside, the cash in your offset account can be committed – in part or in full – to the mortgage capital at any time.

Alternatively you could just wait until the end of your existing fixed-rate term and then reassess.

On my mortgage, there is no early repayment charge on up to 99.99% of the outstanding balance. That has made a big difference. We’ve been able to pay the capital down more quickly and ended up paying less in interest over the life of the mortgage.

Of course, different lenders will have different rules on the amount that can be thrown into actually repaying the outstanding debt. You can typically repay 10% without any early repayment penalties. The financially-savvy Monevator audience should certainly read the small print before signing.

If committing all your savings is too much to bear thinking about without a cash safety net squirreled away elsewhere, you could hold the same balance in the linked cash account as you owe on the mortgage.

Like this, you would pay no interest on the debt, but you’d maintain your emergency cash. Monthly payments would be 100% capital repayment. It would almost be like having a mortgage with no mortgage.

Of course, this method means that ultimately you would start to build up a surplus amount in your savings account – earning zero interest.

But you could periodically remove the excess cash to invest elsewhere.

Planalyst’s journey

I didn’t have a big mortgage to begin with. For one thing I had a chunky deposit. I was also lucky with the housing slump in the recession in 2008.

As a first-time buyer I could afford to be choosy and I chose a probate property with a ‘motivated’ beneficiary. That pushed the agreed price down even further.

Doing the sums, I was shocked the monthly mortgage repayments on my new three-bedroom semi-detached were about half the rent I was paying on a tiny two-bedroom flat overlooking Basingstoke train station.

And I wouldn’t be funding a buy-to-letter’s house in Cyprus. Instead I would be my own landlord.

So I would say I’m an advocate for buying your home if you can. We moved again for work and better schools five years ago. The mortgage repayments are still lower than the equivalent rent on my now four-bedroom semi.

I’m also happy to say that – with a few more months of additional savings into the linked cash account – I’m on track to pay off my mortgage this September. That in turn means I’ll avoid paying the bank – well, building society in my case – another 12 years of interest payments, too.

Once the mortgage is paid off, its associated monthly outgoings will instead be redirected into ISAs and the investments discussed on Monevator by The Investor et al. (Fingers crossed for another long-term bull market.)

Paying off my offset mortgage will be my first major milestone on the track to financial independence and the ability to retire early in my mid-forties.

Hopefully I will feel the anticipated exhilaration of being mortgage-free a bit more than The Accumulator did!

Over time you’ll be able to see all Planalyst’s articles in her dedicated archive.

  1. Financial Independence Retire Early []
{ 55 comments… add one }
  • 1 Simon Rusling June 14, 2021, 10:19 am

    You mention your planning spreadsheet, is there a link to this somewhere please?

  • 2 The Rhino June 14, 2021, 12:17 pm

    Just getting the ball rolling on re-mortgaging as my 2 yr discount (0.89%) is nearly up

    Hoping to go 5 yr fixed this time, still IO offset at 1.29%

    Did see a 1.99% lifetime but it was discount not fixed so you never know what could happen with it.

    Anyone else had any luck uncovering some good/interesting products?

  • 3 Kevin Ancell June 14, 2021, 1:31 pm

    Hey, this is a great post and the first time I’ve ever seen anyone shouting about how great offset mortgages are! I have one and explain them to my friends all the time, who invariably don’t get it and just stick to the more traditional path.

    As it happens, I saved up enough to pay my mortgage off in full in 8 years versus the 18 years I took it out over! However, due to the outlook for low interest rates, I decided to invest the whole whack in 2 x BTL properties and the rest in my S&S ISA.

    I’ve now got 10 years to save up the balance up again, or in fact I may just re-mortgage in 2030 for another 10 years or choose to downsize and never pay the balance.

    That’s the beauty of an offset mortgage, amazing flexibility and access to your capital!

  • 4 ex-pat Scot June 14, 2021, 1:36 pm

    As with many slightly-offbeat products, these can be great for the wise and a trap for the unwary. (see also: interest-only mortgages).

    There are a couple of things to consider.
    1. right of offset. You HAVE to check the small print carefully, to see whether the lender can unilaterally offset your cash balance against the loan, and under what conditions. I heard of occasions of this happening during the 2008 market correction.
    2. FSCS protection. In the case of failure of the provider, then please do check what happens. There is a risk that the cash element is not fully protected, whereas the loan would still be owed in full.
    3. there may be limits on overpayment, de minimis balances and rates etc.
    4. you will often find that the loan rate is not at the competitive end of the range – such is the price for this non-mainstream product
    5. in the case of redundancy/ job loss, you may find that the savings balance is deemed as “savings” for Universal Credit etc, rather than it being an integral part of your home loan
    6. a lifetime offset can be much cheaper than an Equity Release mortgage (although please check the relevant rates)
    7. it can be incredibly efficient, if you are disciplined, for cases such as higher-rate taxpayers, self-employed etc. or anyone with irregular income flows. For self-employed, where you need to make provision for tax owed, keeping it in the offset savings can be really helpful. Just be careful to plan your cashflows wisely.

  • 5 ermine June 14, 2021, 1:37 pm

    > Sadly, you don’t earn any interest on the linked cash account (so it suffers from inflation risk).

    Look on the bright side. The principal advanced on your property suffers from even more inflation risk, so you benefit in real terms even more from paying that principal off with tomorrows worthless pounds when you discharge it. Compared to the real money they advanced you on buying the house 25 years ago.

    It’s not so bad, really. I am all for offset mortgage, it’s a good place for your emergency fund. Although FIRE sorts shouldn’t run into this grief: don’t hold your mortgage with an institution when you hold unsecured debt, as they may set off the unsecured debt against your offset amount. And should the worst happen and you lose your job, natch pull your offset amount out and save it in cleared funds with an unassociated bank before you breathe a word to your mortgage company about your straitened circumstances.

  • 6 Genghis June 14, 2021, 1:52 pm

    Nice article.
    I always thought:
    – the interest rates on offset mortgages were more than their normal cousins and
    – the cash saved in the offset savings account wasn’t working as hard as it would otherwise be in the market. We only hold a year or two of expenses in cash so thought it was never really worth it.
    May need to look into it more and run some numbers.

  • 7 Living Cheap In London June 14, 2021, 2:18 pm

    Another offset mortgage fan here. I first heard of them from a mentor in a job I had 20 years ago, and when I moved to London 18 years ago I got one with my wife when we bought together.

    Works great for us as my Mrs LCIL is self employed, so the offset is the perfect place to keep her tax accrual money.

    For many years now we could pay the mortgage off, but it’s nice to have liquidity in ‘pre-agreed reserves’ from over-paying & the money we previously earmarked for over-paying is now (somewhat more sensibly) going into our S&S ISA’s.

    I don’t think the offset products are quite as competitive these days: ours is with Intelligent Finance which closed to new customers years ago.

    We have a BOE base rate plus 1.09% tracker for the full term. I remortgaged last in the height of the mortgage wars before the 2008/09 crash. I don’t think they’re likely to ever get that cheap again, but you never know!

  • 8 Ade June 14, 2021, 3:11 pm

    Here’s a nice trick posted by Finumus that allows you to keep your annual flexible ISA allowances available while also paying off the flexible mortgage. Good for unexpected windfalls such as redundancy, inheritance, or just keeping options open. If your mortgage provider also has a flexible ISA you can bounce cash between the two either side of the tax year without much fuss.
    https://www.finumus.com/blog/how-to-get-an-80000-annual-isa-allowance

  • 9 The Rhino June 14, 2021, 4:42 pm

    @LCIL – base rate + 1.09% for the life of the mortgage, that is a phenomenal product!

    Has anyone spotted anything currently available even close to being that good?

    This time duration is very much more at the forefront of my thinking..

  • 10 Goony June 14, 2021, 5:28 pm

    Don’t forget Finumus’s excellent offset-mortgage-ISA-hack:

    https://www.finumus.com/blog/how-to-get-an-80000-annual-isa-allowance

    (I skim read the article so apologies if you did in fact cover this point)

  • 11 Juan June 14, 2021, 6:39 pm

    I lucked into a BoE base rate + .19% fixed for life in about 2006. Stupidly still over paid against it. Now considering remortgaging to take some equity out. Remaining mortgage is <£10k with 5 years to run.

    One of the best offers I’ve seen at present is a Barclays premier 7 year fix at 1.49%.

  • 12 Ade June 14, 2021, 6:53 pm

    @Juan, that sounds very much like one I have from Nationwide, lifetime tracker – BoE +0.19%. If it is, you can borrow back any overpayments you have made and can push the term out into your late 60s with no fee.

  • 13 Juan June 14, 2021, 8:11 pm

    @Ade. Mine is an old Woolwich product, now with Barclays, so similar product but different provider.

    You raise a good point. I should check if I can borrow back my overpayments. Thanks for that.

  • 14 Bb June 14, 2021, 8:15 pm

    Nice article!

    Also a massive fan of offsets. They are not the cheapest % but I end up better off because if my specific circumstances (higher rate, btl tax due annually, lumpy bonus once a year)

    I try to optimise by putting all money received straight into offset savings and doing all my expenditure through the month on credit cards, paying the balance fro m the savings when the bill comes. I keep meaning to find a reward credit card to juice this up a bit.

    The biggest win for me however is the optionality- having immediate access to funds is massively helpful.

  • 15 Matthew June 14, 2021, 10:26 pm

    The danger would be essentially keeping far more cash than what an emergency fund should be – how many people seriously would/should keep tens/hundreds of thousands at <2%?
    Could work out for some if they don't need too much in to make it work but I wouldn't go putting more cash just to make an offset the right decision.

  • 16 Brod June 14, 2021, 10:46 pm

    Thanks, Planalyst, I’m another big fan of Offset Mortgages. We’ve covered about 90% of the mortgage and make the mortgage repayments from the Offset account. Free housing. We are about £6,000 short, but we’ve 12 years to find the difference.

    @Matthew – we would and do. I think a bit of recency bias creeping in here. Nine years ago when we bought with an Offset, could anyone predict this very long bull market? And when it crashes, we might buy some nice, cheap equities. Or maybe not, there’s something comforting about having the mortgage covered and a big juicy wodge of cash instantly available.

  • 17 ermine June 14, 2021, 11:09 pm

    > how many people seriously would/should keep tens/hundreds of thousands at <2%?

    I am that guy. When you get old enough/grizzled of fur you value security over ROI. Compounding matters, but as you get older, it matters less, because it ain't gonna catch up with you ; -)

  • 18 Matthew June 14, 2021, 11:54 pm

    Similar to the need for bonds – @brod aiming for rebalancing/timing bonus + more steadiness and @ermine lifestyling + essentially buying the best of the safe bonds in the form of debt in our own name. I could imagine mortgage repayment reduces your exposure if interest rates rise, so are an attractive counterbalance to gilts.

    I believe though that doing it more for reasons of simple repayment because of your stage of life makes more sense than dry powder/timing. I just wouldn’t want anyone getting sucked in too low risk too young, never quite aware of how much they put in and it’s opportunity cost, and I also think people should decide what their emergency fund needs to be and consider whether they actually have too much cash this form – maybe they could cut how much borrowing facility they have access to and use a standard repayment mortgage instead to save on the rate.

  • 19 Paul Barrett June 15, 2021, 1:50 am

    All excellent comments one of which quoted the major risk of offset mortgages which in principle are fantastic products.

    That is where in the conditions lenders will take offset funds to reduce any mortgage debt to permanently reduce the mortgage debt.

    This happened in 2008 and many discovered LL took the offset savings to ensure LTV remained the same due to reduced property values.

    Some had stored offset savings to pay tax bills.

    All of a sudden they couldn’t pay the tax bills.

    There is also a new problem of Wealth Tax.

    It is worth storing savings as CASH which can’t be detected by HMRC.

    It pays to be in cheap mortgage debt for as much as possible to reduce substantially the toxic effects of a wealth tax.

    But hide your cash from HMRC prying eyes.

    The small amount of interest you lose will pale into insignificance compared to Wealth Tax charges.

    Of course a Wealth Tax may never occur.

    Having cash not detectible by DWP also means UC etc is possible.

    The DWP will never detect your cash as it WON’T exist as far as anyone is concerned.

    So remove your cash and hide it away.

    Offset mortgage lenders can’t be trusted.

    It is why you should never have saving with the same institution you have debts with.

    They all have conditions allowing them to take your credit assets to reduce their debts you have with them.

    Of course there is a risk in storing substantial quantities of cash away from banks etc.

    Remember also that debts with other banks means they could take your offset savings.

    Of course you could risk rhe offset account and using a functioning crystal ball withdraw all your offset savings in cash when you foresee the next financial crash!!

    It is a shame offset mortgage lenders are so deceitful in not advising upfront that they will remove savings to reduce debts with them if property values for whatever reason suddenly drop.

    I know just before the GFC I had advised a close friend to get a Santander/Abbey National offset mortgage.

    Got 1% ABBR.

    However I was aware of the sneaky condition allowing his considerable offset savings to be taken to reduce his mortgage debt.

    Yep I actually read the offset mortgage conditions.

    Fortunately I warned him in sufficient time to allow him to remove all his offset savings and hide away in cash.

    With banks now having the facility to rob your savings for bank bailins having savings with banks is very unwise.
    Just ask the citizens of Cyprus!!

    Keep in cash away from prying eyes is a very sensible savings strategy.

    Cash cannot be proven to exist by HMRC if you say you don’t have any savings.

    You simply don’t tell anyone and then they can be none the wiser.

    I find it hard to believe that HMRC will be raiding homes to find that £20000 cash that might tip someone into Wealth Tax thresholds.

    The only pain with cash is when they change the notes you have to go to multiple banks to exchange for new notes.

    You obviously don’t go your own bank!

    Being in plausible debt is the best way to prevent HMRC and mortgage lenders robbing your cash.

    Remember also the care home issue.
    The more savings and equity you have the more the Council will rob from you.
    Try and be in as much debt as you can to prevent the Council from robbing your assets to pay care home fees.

    Obviously the cash you have squirreled away you can hand out to who you want and nobody will be the wiser

    Offset mortgages though great in principle just set you up for HMRC; banks and Councils to rob you of your assets.

    With IR being so low it makes no sense keeping them where they can be detected by the PTB!!

  • 20 ex-pat Scot June 15, 2021, 6:28 am

    @Paul Barrett – Wow!

    1. I wouldn’t be posting that in my actual name…
    2. much of what you are suggesting is fraud and money laundering style activity, seeking to conceal assets from HMRC.
    3. the *whole* point of an offset mortgage is to have the loan and the savings with the same party, so that the debit and credit balances can be notionally offset in order to minimise interest and costs. Moving the savings outside means that there is no savings asset to *offset* the mortgage liability

  • 21 LadyFIRE June 15, 2021, 7:55 am

    Very interesting article. I think I vaguely heard about this concept before, but this article makes it very compelling. I need to investigate whether it exists in my jurisdiction, but I think this could be a great way to “have the best of both worlds” in terms of paying off the mortgage, and yet, having capital in hand for other opportunities. Thanks for sharing!

  • 22 ZXSpectrum48k June 15, 2021, 8:13 am

    I’ve only ever taken out IO offset mortgages. Took my first one in 2002. Turns a mortgage into an overdraft. It’s free liquidity, tax efficient etc. Can’t see why you would use anything else. Only a margin loan is better.

    As an aside why is the comment section of Monevator attracting more and more conspiract theorists? I assume a sad reflection of society. I often say in my job that I’m paid to be paranoid but jeez.

  • 23 Juan June 15, 2021, 8:49 am

    Hi @ZXSpectrum48K, Would you mind sharing what provider you use? Thanks.

  • 24 Naeclue June 15, 2021, 9:35 am

    I have an IO offset with Santander at BoE base + 0.5%. Only a few years to run unfortunately and I have all but a few k of it paid off as it is the best return I can get on instant access cash right now.

    I would love to be able to extend/replace with a similar product, but think it unlikely I will be able to get anything like as good a deal again. The other difficulty we have is that the only income we have comes from our savings and investments and I suspect we would be hit with “computer says no” type of problems for the best value products, even though our LTV would be under 10%!

  • 25 Mark June 15, 2021, 10:24 am

    Another happy offset user here. Fully offset for a few years now with LTV gradually decreasing, now around 40%.
    Obviously the offset savings cash would have performed much better invested in the market or pretty much anything else in the last 5 years. But I don’t see it as an opportunity cost. My default position would be a fully paid home with no mortgage. The offset mortgage allows the same peace of mind of fully paid home plus a huge, fully flexible, pre-approved, non margin-callable line of credit for either an emergency or an opportunistic asset purchase. You can’t beat that.

    Speaking of flexible line of credit, I have a question for any accountants out there. If I buy a second property with funds from the offset savings account, do I get tax relief on the interest cost? And in order to get that, does the actual purchase have to happen with funds from that account from the start? What if for example I buy it with other savings but then I need emergency cash (that I wouldn’t need had it not been for the BTL purchase) and use the offset savings?

  • 26 ZXSpectrum48k June 15, 2021, 10:52 am

    @Juan. I was talking in the past tense. I don’t currently have any mortgages but the three I have had were all IO offset.

    I’m not sure I’d get a mortgage any more. The last time I tried, the bank didn’t want to lend to me even at sub 20% LTV. The “mortgage moron” (sorry “mortgage adviser”) didn’t seem to understand anything. As a partner in an LLP he couldn’t get his head around the fact I had no salary, just a drawing. He also didn’t like the fact that I had already bought the house for cash and wanted to know what I was going to do with the money. I told him that wasn’t his concern since it didn’t impact the economics of the lending.

    Anyway now I use margin loans. Cheaper/more flexible.

  • 27 Boltt June 15, 2021, 11:29 am

    @mark #24

    Not an accountant but I am in a similar position – I have kept a large mortgage on my main residence (lower interest rate than BTL) to fund mortgage free rental properties. I have and still do claim the tax relief on the notional mortgage costs.

    I looked into it about 10 years ago on HMRC and it seemed to be in the slightly grey area but OK – I recall some mention of evidencing the financial link between the funds from one property being used to buy another.

    Hopefully it’s still OK!!!!

    B

  • 28 Boltt June 15, 2021, 11:31 am

    @mark

    Ps I’m not an IFA or tax adviser either -please DYOR, and let us know what you find, and decide.

  • 29 Brod June 15, 2021, 12:44 pm

    @Matthew – our Offset Mortgage cash earns us effectively about 2.5% interest with instant access (not the best deal, granted, but there you go). Everyone has their own risk tolerance, investment horizon, personal preferences, life goals, etc.. Me, after years of credit card balances, overdraft fees, etc, my wife taught me to avoid debt like the plague. Yes, mortgages are a necessary evil and “benign” debt, but they still need to be paid off. By making the effort over the last few years, we’re now freed of the need to maximise salary and all the sacrifices that entails.

    Btw, if you’re going to FIRE there may be more than one way to skin a cat. Get your housing sorted, pay off/reduce the mortgage THEN save like a b*gger for 10 years on a higher salary due to career progression. The effect of compounding if trying to retire early is obviously reduced. Especially as those early savings will likely be smaller than if you’re in your forties or so, the peak earning years.

  • 30 KeepOnKeepinOn June 15, 2021, 1:56 pm

    First IO offset back in 2001 – base +0.79% tracker (lifetime), liked it so much – got a second in 2010 base + 1.99% to fund next move. Paid small bit of capital off so it serves as our “emergency fund”. Rest all gone to ISAs (believe growth > interest rate, and so it has been) surpassed outstanding loan level last year & growing still. Fine to keep growing – and will maybe pull the cord in a few years if IR start moving.
    Mrs KOKO would probably feel happier pulling sooner – but just different risk perspectives. ISA surplus will support bridge to 55/60 as DCs & DBs kick in.
    3.5 yrs to go & counting…..

  • 31 Algernond June 15, 2021, 4:47 pm

    I had an acquaintance who was (unfairly) in court, and (apparently) it was very useful to empty savings accounts / ISAs into the offset mortgage for while to get around the means testing for the fine.

    @ZXSpectrum48k – it depends what you mean by a conspiracy theorist:

    Conspiracy Theorist – Someone who believes the rich & powerful conspire
    Idiot – Someone who thinks the rich & powerful act in their best interests

    (I’m not calling you an idiot by the way!)

  • 32 Playing with Fire June 15, 2021, 5:24 pm

    An offset mortgage with a lifetime rate or tracker makes bridging the gap between FIRE and SIPP age a little easier. Lock in the rate and lending when you have an income, add cash depending on interest, inflation and temperament, spend it before SIPP age, pay it back once the SIPP is cracked open.

    Any recommendations for offsets (or long IO fixes)?

  • 33 SemiPassive June 15, 2021, 6:10 pm

    I did use First Direct for an offset mortgage for many years and was a fan, but their offset rates – initially competitive – have been astronomical for some time now. I just checked and they are about 3.5%!
    When I last looked for alternative offsets from rivals a few years back I found that unlike First Direct none provided the flexibility to borrow back – online, with no approval needed – what you had already committed to paying down the principal amount.
    It encouraged aggressive overpayments as you knew you could always borrow back in the event of unforeseen big bills or other scenarios – very handy as a contractor.

    Maybe First Direct decided the product was too risky and hence loaded the rates, but either way they clearly are not encouraging take up now.
    So back to a conventional repayment mortgage now as the rates are lower and a move back to perm employment meant the flexibility wasn’t as important as it used to be.
    Two things to keep in mind now though –
    1. Need to maintain the discipline and keep a separate dedicated savings pot to be able to make a lump sum overpayment when the next remortgage is due.
    (That may as well be kept in Premium Bonds the way cash saving rates are going)
    2. The emergency cash savings pot has been increased since I know I can’t borrow back on a whim.

  • 34 Merlotman June 15, 2021, 9:07 pm

    Another big offset fan here
    I think it’s Hamlet – I’m not a big fan of the bard but an OM helps you “neither a borrower nor lender be” and generally run it on a nil net balance. I therefore use my undrawn offset as my cash/ bond allocation in my 70/30 equity/bond split. Best of all First Direct have agreed to extend my offset until I am 80. I may not even need to draw on it

  • 35 Planalyst June 15, 2021, 9:36 pm

    Wow! I wasn’t expecting this many comments. Thanks to everyone for taking the time to read/comment on my first article. I never knew that there were so many others out there who also liked an offset mortgage as much as us!

    @Simon Rusling unfortunately no link to my budget planning spreadsheet, mainly because it has my personal spending history in it. Though you have made me think I could make it into a sort of template to show others how we have used it to automate our spending categories and graphs for monthly budgeting speed.

    @Kevin Ancell maybe if you send a link to this article to your friends they will become converts to the offset way of life!

    @ex-pat Scot thanks for the extra caveats. As a Paraplanner, I love a good caveat! 🙂

    @Ade and @Goony thanks for both recommending the Finumus article. It’s a really interesting read. I wish I had seen it beforehand so it could have been more prominent in the article, using the ISA allowance in that way could work really well for some people.

    @Bb we have a Tesco credit card at the moment to get Clubcard points that we use on our annual Tesco food shopping delivery subscription. Also for tickets to days out which is becoming more relevant since attractions have opened up again. We used to have an Amazon loyalty credit card, but they stopped the points for a while, hence our switch to Tesco’s credit card. I think the Amazon one has come back now in some guise. I guess work out where you spend most of your money to get the best out of the points on offer and plan accordingly for you.

    @Matthew I briefly mentioned in the article that you could end up with too much in the offset linked savings account. Particularly in our situation where we now have a small mortgage balance that is eroding quickly with the monthly capital repayments. At that point it would be wise to periodically move the cash out for investing or spending. An emergency cash fund is generally recommended to be around 3-5 months’ worth of normal expenditure, if that’s all you would want to keep in the offset then it would still be worth doing in the long run to reduce the interest paid.

    @LadyFIRE glad to have helped you find out more about offset mortgages. Hopefully there are similar products where you are.

    It’s also been interesting to read about the varying interest rates you’ve all secured over the years. And that a lot of you have interest-only offsets, something that could be even more attractive to the FIRE masses who want lower housing costs whilst saving every penny maybe.

  • 36 Matthew June 15, 2021, 11:10 pm

    Well I know that it’d help cashflow in early retirement to reduce the mortgage – I could overpay/offset (either in one product or separately) but in the opposite direction I could actually stretch it out beyond when my DB will kick in.
    Do agree though that if you’re at the point near retirement of wanting to buy safe bonds, then if anything this mortgage bond in our own name is hard to beat. I wouldn’t mind offsetting it with something like VLS 20 though – that way you still have more accessibility than a residential mortgage would anyway.

    I think that when we consider that we’re saving X% of interest, use the rate that the cheapest mortgage would be, not whatever rate the offset is, otherwise you’d be paying more on the rest just to trick yourself into thinking you’re doing better than a manual standard mortgage + savings set up.
    (Maybe to model that use fixed savings if you want safety but don’t need instant access to the whole lot)

  • 37 Kevin Ancell June 16, 2021, 9:33 am

    Merlotman – you mention you have extended your First Direct OM until you are 80, did you just simply remortgage or how did you ‘extend’?

    I’m in this position, with 10 years left and i’d quite happily re-mortgage tomorrow for 25 years but… the rates are significantly more than the BOE + 1.79% that I pay, so my plan was just to monitor it over the coming 10 years.

  • 38 Brod June 16, 2021, 9:44 am

    @Matthew – “when my DB will kick in.” Well, quite, that completely changes your risk tolerance/perception, doesn’t it?

    “…this mortgage bond in our own name” – but surely a mortgage is a negative bond? A bond pays you a fixed nominal amount every period. A mortgage YOU PAY a fixed nominal amount every period (given interest rates don’t change.) The Offset amount simply reduces the interest you are paying. The principle still needs to be repaid. Fine if you have a guaranteed income e.g. a DB pension or annuity, less so if you have to rely on your investments.

    Btw, we can transfer from our Offset account to our Current account overnight, which I’m sure beats selling VLS20 in your brokerage/ISA/SIPP account and transferring the money. Are you confusing overpaying a mortgage with an offset mortgage maybe?

  • 39 Merlotman June 16, 2021, 6:59 pm

    @Kevin
    Technically it was a remortgage but in effect what they did was roll over all the existing terms, apart from expiry, into the new mortgage.

  • 40 Merlotman June 16, 2021, 7:12 pm

    @Brod
    I think I understand where Matthew is coming from. Under my offset arrangement I have used spare cash, which would have earned nada, to reduce the mortgage I.e. I have bought my mortgage bond ‘earning’ me a rate of interest equivalent to my mortgage rate. I can raise cash in future if needed by redrawing on my mortgage (which I view as selling my mortgage bond) but I lose the interest saving. I know it’s a strange way of looking at it but works for me on the perspective of opportunity costs

  • 41 Kevin Ancell June 16, 2021, 10:25 pm

    @merlotman really, how did you manage that? I figured if I remortgaged that they would apply a higher rate in line with current rates, not just move out the expiry date. Can you pls break it down for me just so save me phoning them up and sounding like a berk ha ha.

  • 42 Mrs Miggins June 17, 2021, 4:38 pm

    I think Ms T.McGee raises some good points. I sadly had to fix my mortgage after my ex ran off with my best friend so I was left with the mortgage but I know lots of people have done well from offsets.

  • 43 IanT June 17, 2021, 5:51 pm

    We’ve had our offset since April 2005 at BoE +0.75% for the life of the mortgage, which now has 6 years to run. I retire in 2 months time and I would never look to pay it off early, instead using the offset as our cash buffer and a general depository. It offers us great flexibility. Everything else is in ISAs and SIPPs. They’re a truly wonderful financial product and I’d encourage anyone to consider one.

  • 44 Brod June 18, 2021, 9:02 am

    @Merlotman – oh, that makes more sense. Ta!

  • 45 An Admirer June 18, 2021, 1:42 pm

    I have used offset mortgages twice (the first being so good, I did it again).

    To me, it’s a killer weapon especially if you can overpay. It gives you large flexibility. No single product or tool has helped me financial so much.

    An unadvertised secret is that some providers allow you to offset cash ISAs which we’ve done to tax shelter cash while offsetting. After many years, once you have “paid off” the offset, you can transfer the (substantial) ISAs out (moving back in unsheltered cash) and/or into SSISAs. When I started, mortgage/interest rates were in the 5% zone so this was well worthwhile. In the past decade (!) or so, less so but it’s still the closest thing you’ll find to a free lunch because you can overpay your mortgage AND use your ISA allowance together efficiently.

    Also gives huge freedom recently with low rates to borrow against HMRC by taking cash out of the offset to get higher rate pension relief (esp. in the £100-125k penalty zone) which can go back into the offset…

  • 46 Kevin Ancell June 18, 2021, 2:16 pm

    @an admirer, I don’t quite follow your points, much like I didn’t fully follow the finnimus article. The specific area I don’t get is the benefit to moving funds in and out of the offset mortgage.

    At this moment, I fully offset my mortgage but had 10 years left, so took it all out and invested it in BTL property and S&S ISA’s. I’m comfortable that I can save it up again or I’ll just keep investing all new cash flow and pull it out when needed if I want to settle my mortgage.

    At this moment I’m not seeing what further benefits of moving cash in and out could bring me?

  • 47 Merlotman June 18, 2021, 5:22 pm

    @kevin
    It was/is a tracker and the same margin was applied – don’t know whether that makes a difference to the explanation

  • 48 Ade June 18, 2021, 5:32 pm

    @Kevin Ancell – I can give you some of the thinking that suits my current situation. Leaving the cash in overpayments/offset at ~2% while also keeping the ISA allowance door open creates the space for sheltering potential cash influx from redundancy, inheritance or shifting some of the 25% lump sum from the pension. At one of those events I can leave the loan paid off and fill the reserved ISA allowance. I now view the amount allocated to the mortgage overpayment as part of the lower risk element of the total portfolio. Using leverage for equity investment has fortunately worked out well for many years, however as I move closer to being able to draw the pension, I’m now reducing the leverage risk. I also have a large proportion of my wealth in the pension wrapper due to the 40% tax break upfront. I aim to balance this out a little with ISAs when I can access it to help minimize income tax during drawdown.

  • 49 Kevin Ancell June 18, 2021, 7:29 pm

    @ade that all makes perfect sense in the context you state it in, I could understand why that works well for you.

    I’m 40 so in reality it’s going to be 20 years until I can touch my pension, so I’m trying to focus on more accumulation in property and equities to allow me to semi-retire by 50. Unfortunately due to job changes, I ung family, moving abroad etc, I took the more risk averse scenario of just saving within my offset account…. Until I finished then decided to go back to the start and leverage myself ha ha.

    Dsepite this I’m going to chew this over and understand if there is anything here that I should consider implementing for long term benefit. Either way, offset mortgage is a wonderful product and probably the best financial decision I’ve ever made.

  • 50 David June 18, 2021, 8:43 pm

    I researched this subject extensively after reading the Finumus article which others have linked to. If you have large ISA balances and want to reduce the risk of capital loss that might happen from investing in stocks & shares, an offset mortgage is a great option while you “wait” for other money like an inheritance or big payday to pay the mortgage off. And this means you don’t have to liquidate the ISAs, permanently destroying the tax shelter in the process.

    The main flexibility comes from having an interest only product like the First Direct one. Otherwise you still have to make large monthly payments for the capital repayment part of your monthly mortgage payment. You have to be earning £50k or £75k joint to qualify for the First Direct product. Where other lenders allow interest only there are tough hurdles around minimum income and LTVs for example. Many don’t allow interest only at all.

    The flexible ISA transfer “game” is an annual pain, and could potentially go very wrong if there are any glitches with the bank transfers. It would be better to find a lender who allows direct offset of the ISA rather than only allowing offset with a special purpose savings account. I’d be interested if @An Admirer could back his or her claim up with names. From what I could tell, Barclays is the sole institution that allows this – and last time I checked, their offset product was a very poor value 2 year fix with an astronomical arrangement fee.

  • 51 Kevin Ancell June 19, 2021, 6:42 am

    @merlotman my point was did you just phone them up and tell them you wanted to remortgage and they offered you your existing rate or did you have to suggest it or haggle with them?

  • 52 Gadgetmind June 20, 2021, 3:40 pm

    We’ve had an IO offset tracker mortgage for nearly a decade. It was initially to let us lend money to daughter for her to buy a house without touching our ISAs, but it came in handy later when both set of parents had nightmare down-sizing experiences and we had to provide them with funds to buy new house even though old sale had fallen through (and more than once). We starting chucking lump sums into the offset account fairly early on and it was all pretty much fully offset within a few years. We just got a letter asking us to call to discuss our plans for paying off the mortgage at the end of the term when I’m 65. As there is around £2.80 not offset, I’m not sure I can be bothered!

  • 53 Merlotman June 20, 2021, 11:03 pm

    @Kevin
    I just called them.

  • 54 Mark July 6, 2021, 1:14 pm

    @Boltt #27
    Thanks. That is also my understanding from what I’ve read in various forums. If I find positive confirmation I will revert.

  • 55 Kevin August 20, 2021, 11:32 am

    @merlotman, i finally got around to phoning up First Direct and they also are happy to let me extend my mortgage duration by 15 years at my existing rate of 1.74% + BOE BR, just need to go through a basic screening to ensure they are satisfied with my current state of affairs. I did ask them if i could also release a bit of equity from the house at my existing rate but was told no, new borrowing would needed at current rates i.e. 3.19% + BOE BR.

Leave a Comment