Mummy in the foothills

That was like reading another language, I have been gone far too long.
If we sold up and went today it looks like we'd have enough for a 60% down payment on a house where we want and with enough space for the three of us (4 if the big lad stays home) no idea how UK home loans work at all, but we've bought and sold in US a few times and are pretty good with this side of things. Sucky part here the realtor gets 6% it's sinful.

paranoidandroid

Oh they're all up for a bit of negotiation on that figure down here these days. 6% has gone along with the house sales.

Anyone in FL that wants to sell a house and know it's going to cost over $1500 in realtor's fees can do a course and sit the state real estate exam, and become your own realtor.

dunroving

Offset means that any cash you have in "linked accounts" with the mortgage lender (usually a bank) is offset against the mortgage debt (so you don't get charged interest on it).

Example: Buy a £300k house, with £100k deposit and a mortgage for £200k (this would mean a 33% deposit, and a mortgage that was 67% "loan-to-value" (LTV)).

Imagine your monthly payments are £1,200. Some of this will be interest on the £200k you owe on the loan, the rest would be capital repayment (paying money off the loan).

With an offset mortgage, if you have £50k savings in linked accounts, this means you'd only pay interest on £150k. Therefore, less of your monthly payment would be interest, and more would go towards payng off the loan.

If you have £200k saved in linked accounts, you wouldn't pay any interest at all (so the monthly payment would go entirely towards paying off the loan).

In this way, you can pay off the mortgage more quickly. You might say, "Well why not just buy the house outright?" Because then you have no liquid capital (all your money is "in the house"). With an offset, your savings are essentially earning tax-free interest (because they are offset against gross mortgage interest), but you always have the flexibility of being able to access the money if you ever need it.

A tracker is a mortgage with an interest rate that is "tracks" a certain percentage above the Bank of England base rate (currently 0.5%). I have a lifetime offset tracker with Barclays at 0.59% above BOE. So, currently I pay 1.09% interest, and if BOE went up to 1%, I'd be paying 1.59% interest. This arrangement lasts for the length of the mortgage (a lot of mortgage deals these days are fixed term - say for 36 months, after which you have to then remortgage). IMO, these fixed term deals are scams that earn the banks more fees when you remortgage.

Hope that's clear. If not, just ask.

I tried to use short words.

sallysimmons

That was excellent! Thanks so much for taking the time to explain.

Wow, the offset mortgages sound like a really good deal for the homeowner. No wonder US banks don't offer them - everything here is based on whatever is best for the banks.

nun

A common approach in the US is to get a fixed rate mortgage (15 or 20 yr term) and use your capital to try to get a better return than the mortgage rate by investing in stocks and bonds. You can also deduct mortgage interest to reduce your taxes. Also there's no penalty for extra payments or paying the mortgage off before it's term

I hadn't heard of the offset mortgage, but it sounds interesting if you have the capital. If you do it right it's like an interest free loan, although I bet there are fees etc that will apply. I see that offset interest rates are higher than regular trackers. Do you have to use linked accounts at the mortgage provider? and do they pay interest etc?

I still lean towards paying for a house outright if you have the cash. It's simple and also reduces your need for income so has tax advantages.

Mummy in the foothills

Thank you Dunroving

dunroving

As I have learned to my considerable expense, and as all the disclaimers say, "The value of your investments may go up or down".

The old saw about the stock market consistently beating savings rates no longer applies after the debacle of the tech bubble bursting, the post-9/11 crash, and the recent global cock-up. Unless you had the cash and nerve to invest considerable amounts immediately following each of these events, of course ...

nun

I agree, which is why I'd probably just buy a house rather than doing any mortgage, offset or otherwise. Further reading has shown me that Barclays Lloyds etc make you put your mortgage offset in one of their saving accounts, but they don't pay you any interest.

My attitude is to buy the big items, house etc so I don't have to worry about them. This reduces my need for income and thus reduces my tax bill as well. I make sure I have a good cash float to even out any market ups and downs. Then I invest what capital I have left 50/50 in equities and bonds safe in the knowledge that the ups and downs of the market won't wipe me out.

dunroving

Exactly - that's how it works. If you took out an offset now, you'd save 3+% mortgage interest on anything in the linked account (and what you don't pay in interest would be paid off the principle), but in an easy-access savings account, after tax you'd never make that much ... that's the whole point of an offset account and why people like them so much.

Lorac05

Thanks for the explanation of offset mortgages - I'd never heard of them but they sound like they could be beneficial to me when I come home as I should have enough to buy a house outright with a little capital left over. The offset mortgage seems to indicate that I should be able to have access to more capital instead of putting all my eggs in one basket so to speak!!

Sally Redux

I was trying to think of what the 'offset mortgage' was called, I know my brother has one and says it's very good.

dunroving

For me, right now the offset isn't too useful (because I was lucky enough to mortgage in 2007 when trackers were only .5% above abse rate). So now, while everyone getting a new mortgage is at 3%-6%, I'm lucky enough to have a mortgage at 1% (one of the few lucky financial moves I've made).

So now I have "unlinked" my ISAs from the mortgage and am actually earnng interest on my savings (bacuse my ISAs are at something like 3% interest). But back when I first got the mortgage, my mortgage interest rate was above 5%, so my offset savings meant I saved something like £1,000 in mortgage interest in the first 15 months.

the offset is definitely worth considering because you always have the option of paying off the mortgage any time you want, but in the meantime, all of your savings are acting as if they have been paid off your mortgage, but you can get at them if you ever need to.