Source
r/UKPersonalFinance•
JimHadar

Interest-Only Mortgage with an Offset savings account - am I better off now using a standard savings account since interest rates are above the mortgage fixed rate?

This sounds like it has an obvious answer but wanted to check the details here so I'm not missing anything.

My wife and I took out a mortgage in 2021 for £200,000 at 1.65% fixed for 5 years, ending in Q3 2026. We've so far saved £35k in it, and are hoping this will go up around £15k per year until 2026.

As we planned to save for that period, our financial advisor back in 2021 said the offset account offered better interest rates than you'd get elsewhere, so it made sense to save using an offset account rather than a savings account.

Now that High St banks are offering such high interest rates, are we now better saving elsewhere for the same period and leaving the offset account empty?

Posted Jul 18, 2023, 6:23 PM UTC

11
BogleBotMOD137•

Hi u/JimHadar, based on your post the following pages from our wiki may be relevant:

^(These suggestions are based on keywords, if they missed the mark please report this comment.)

1
LittleCousinScampi•

I agree that moving your savings would be wise. In the offset account you're effectively getting 1.65%, which is (now) a pretty bad rate. You could put a portion of it in easy access savings (rates 3-5%) and put the rest in 1-year fixes to get over 5%.

Also, you'd have to do some maths on this, but it looks like your savings might be/will be high enough to have to pay tax on the interest (you have a £500 allowance if you're a higher rate tax payer, or £1000 if basic rate, though that's for each of you), so you might want to put your savings into ISA accounts to maximise your interest vs putting it in savings accounts that don't offer the same protection from tax.

You don't necessarily have to take out a fixed ISA (or fixed non-ISA) but it looks like you don't need that money straight away (esp. if you've allowed a few months' expenses in an easy access account), so you could consider yearly fixes, which gives you better rates than easy access, but also some space to reevaluate the market each year. Even if you do suddenly need the money, most fixes will let you have your cash immediately with the loss of a bit of interest - not the end of the world.

Good choice on that mortgage, in any case. Wow!

1
JimHadarOP•

Thanks for the advice!

1
JimHadarOP•

!thanks

1