Is it advantageous to use a lower-interest rate loan to enrich the savings account of an offset mortgage?

Question

Background: I have an offset mortgage on my house. I specifically chose an offset mortgage as my employment circumstances mean there will be irregular and unpredictable cash flows in and out during the term of the mortgage. The interest rate on the offset mortgage (which is fixed until March 2018) is 3.05%.

The UK has been in an 'exceptional', 'unprecedented', 'unsustainable' low base rate era for some seven years now, and (although it's taken a while) real-world borrowing rates have come down and down, to the point where in the past few months I've started to see unsecured personal loans being offered at as little as 3%.

So what I think I'm looking at here is the opportunity to borrow at 3% and lend at 3.05%—in which case I should jump at the chance, right? (subject to acceptance on the loan of course) But I'm not sure if offseting a 3.05% mortgage exactly corresponds to getting a 3.05% return, or if it's just a handy rule of thumb.

Are there any reasons not to borrow as much as I can at 3% APR and put all the money in an account offsetting a 3.05% p.a. mortgage? Do I need to fire up Excel to model the true effective returns and the exact details of when repayments take place and when the offset recalc is performed—or is it enough to say "3% is less than 3.05%, do it" ?

_{(Please note the united-kingdom as I know many mortgage- and loan-related facts are different from united-states. Also I'm not remotely worried about cash flow or budgetary discipline—I'm very good at not spending money that I know isn't mine.)}

Answer 1

It is unlikely that the plan is worth doing, given the numbers you have used. However, your thinking is correct that given enough of a rate differential, it could be worth doing.

Consider that for each $100k of your mortgage [and I assume your limit for an unsecured personal loan is likely far less than 100k], you would save only $50/year by taking out a personal unsecured loan of 3% and paying off your 3.05% mortgage.

Instead, such low unsecured rates may be a signal that it would be worthwhile for you to renegotiate your mortgage. You will likely need to pay a fee, but the savings could be significant.

For each $100k of mortgage, a 1% rate change from your current rate saves you 1k per year. So if you can get a mortgage rate of 2% [which may be possible if an unsecured loan costs you 3%], compare the initial administrative fee against those savings, over the course of the term of the renegotiation. ie: $300k saves you 9k over 3 years, so would be well worth even an initial $3k admin fee.