Leave Fixed Rate Early, Switch to Offset Account - FD appears best option?

Anon · 1 February 2009 at 8:42PM

I am just getting my head around offset mortgages, and considering bailing out of a five year fix, one year in (:o - in my defence, around this time last year all the predictions were mortgage rates would continue to rise, as indeed they were, so fixed for 5 years - so much for expert advice at the time, though I appreciate I did accept the risk and was happy at the time to be paying less than SVR!). There is an interesting article about this on Thisismoney at http://www.thisismoney.co.uk/mortgages/mortgages/article.html?in_article_id=471317&in_page_id=58.

Are there many differences between First Direct and One Account? I understand that the FD is offset against savings and current account, while the One Account is one account (:rolleyes:) - a current account mortgage where all your money and the mortgage are combined. Is one better than the other, or just different?

If I have understood correctly, in either if I took out a £100,000 mortgage, and had £10,000 savings, I would pay interest on £90,000 (in the FD, £10,000 would be in a savings account, for One, I would have a balance of -£90,000), plus my monthly salary etc would be offset agains the total until I had paid monthly bills etc. If I had, say, £10,000 savings, to retain flexibility (rainy day fund given the current economic environment), would it make any difference in real terms reducing the mortgage to £90,000 or having a £100,000 mortgage and immediately paying in (and leaving in) £10,000 of savings? Or indeed, getting £110,000 mortgage and retaining £10,000, plus putting in £10,000 (therefore £20,000 buffer)?

I appreciate that I will have to pay the redemption penalty (£3k approx. plus exit fee), arrangement fee for the new mortgage, legals (if not on offer - FD seems to be free for remortgage?), valuation etc - anything else to consider?

I will also be losing the "safety" of the fix (5.63% Nationwide) for either an SVR (One Account - 4.1%) or Base Tracker (FD - base plus 1.89% - currently 2.89%) but estimate that over the four years remaining of the fix, even with early repayment etc, then I would save over £3,000 (assuming FD, as an example, remained at 2.89% - without taking into account the offset feature).

Am I missing something? A fix rate clearly means I know exactly what I am paying for the next four years ... but that is not very re-assuring if I know (now) that I am paying significantly more for the next four years :rolleyes:. That said, if the mortgage interest rates start rocketing again, I could switch again (paying fees again

) - but how likely is it within the next four years that they will end up with all rates above 5.63% (not saying it isn't possible)?

Many thanks

Anon

Anon · 8 February 2009 at 4:27PM

Does anyone have any thoughts on this please? Has anyone read any reliable (if any can be reliable!) forecasts on what will happen to the interest rates in the short and medium term? Clearly, since I posted the message above the rate has come down again, now to 2.89%.

With this offset sort of account, does it always pay to put all your money in there? For example, what rate would I need to get in savings to mean it would be better putting it into a separate savings account rather than offsetting it or paying off more on the mortgage? Personally, I am looking to pay off the mortgage as quickly as possible (£500 per month overpayments at the moment) as in my mind I will then have £700+ per month (or £1200+ if including the overpayments) every single month, more than I have now.

Many thanks

Anon

PS - Yes, before anyone pipes up, another "should I bail out of my fixed rate early" thread - perhaps the mods should fix one of these threads to the top of the discussion board and merge all our threads?

atlantis187 · 8 February 2009 at 5:27PM

I remortgaged with FD in december and have to say they have been excellent we currently have 2 current account in seperate names mine and my wife 1 joint current account where they take the mortgage payment from and where we pay all our bills from and 1 saving account. All these account are linked to the mortgagae and are offseting. The mortgage account shows up on the internet banking also and u can see it going down each month after u have made the payment.
We also got £100 each as a joining incentive.

I would highly reccomend FD. Have no experiance of the one account but I would not like to to have all my money in just one current account it would look quite depressing constantly seeing ur account overdrawn £90k etc.

willmatt · 11 February 2009 at 4:18PM

I'm in the process of remortgaging to FD on the 1.89% tracker, I thought I'd share my thoughts on your questions.

I can't comment on what way interest rates are likely to go but with this product, if you no longer like being +1.89% above base (and let's face it, if rates hit 5% or above, you'd be forgiven for that) then you can check the costs of remortgaging to a better product and if it's cheaper, do so. You're not fixing, but neither are you tieing yourself in, if rates rise.

You mention FD is fee free, I don't believe this is the case, there is a £799 fee plus standard valuation on a scale according to the value of the property (approx £200). All of this is clearly explained on their site.

The main benefit for me, with this particular account is that when offsetting, you pay less interest every month. You can stuff the money left over from this 'saving' and any other 'overpayment' into your savings a/c but have the flexibility to 'borrow back' that overpayment at any time for as short a time as you like. Also, every penny you have counts, your salary from the day it goes in until the day it's spent, for example.

On your final question, remember that high rate raxpayers benefit more from offsetting than standard rate taxpayers, if you ARE a high rate taxpayer then given the savings market, I would think it's very hard to beat offsetting, but not impossible.

There is a calculator on the FD site under, "Mortgages" then "Take the £1 challenge" which shows how much you would need to earn in interest to make it more advantageous than offsetting. (Currently, according to their figures 3.67% and 4.92% for standard and high rate taxpayers, respectively.) Money in an ISA doesn't attract any tax, obviously, so this would currently work out better if you find a rate of 2.89% or higher in an ISA.

See the sticky at the start of the forum for far more detailed calculations and explanations on the benefits and or pitfalls of this type of borrowing, however.

cbrpaul · 11 February 2009 at 4:39PM

Been with them for a year or so , very good i must say , just shame FD aint dropped their SVR for the last 2 BoE drops ( 1%) , but hey im just a winging customer ;-)

mothershipton · 11 February 2009 at 6:16PM

hi, Anon, I am in exactly the same position as you, however Im not convinced that we will end up better off, we have an ERC of £1600 and fees from fd of £1000 as per a previous post. I could shorten the term by a year and save a years interest, thus keeping payments the same as my existing account with Nationwide. Im not convinced that interest rates will stay low for very long so I dont think Im going to go with this idea. We would therefore need the rates to stay the same for a year to see any beneift. Plus there is all the hassle of moving bank accounts, or has this got easier?

firesidemaid · 11 February 2009 at 6:30PM

i've just read this through quickly, but from what i can see is it really worth the 3k penalty plus the new set up fees etc?

we have just moved to FD, and they do have quite strict lending criteria - low loan-to-values plus they will not take any overtime etc (even contracted) or benefits into account.

at 4% over the next four years you would save the 1.63% which is £136 a month or £6520 over the 4 years. but the rates are likely to go up from what they are now over this time, as it does your gains would be less than this.

your total fees could be 4k plus. why not overpay on what you have (with security), knowing you are getting a much better rate on your 'savings' than you could anywhere else.

lukekelly_2 · 11 February 2009 at 6:42PM

You need to do all the sums and compare the scenarios. There are links to websites that do this all the forum, although I'm too lazy to dig one out at the moment! Excel will also do the job although it's not completely trivial. Instinctively though I'd say that it's not going to be worthwhile for you, but again, you need to calculate exact figures and compare them.

With that tracker it would need a base rate of 3.74% to equal your current deal. I'd suggest that the base rate reaching that level and higher at some point over the next 5 years is a likely event.

Anon · 11 February 2009 at 11:01PM

willmatt wrote: »

You mention FD is fee free, I don't believe this is the case, there is a £799 fee plus standard valuation on a scale according to the value of the property (approx £200). All of this is clearly explained on their site.

Thank you for your detailed response (and for other responses) - just one minor correction though, I didn't say that it was fee free, I said looking at the information on their website, the legals (solicitor) looked to be free, but £799 fee plus valuation fee.

The problem with overpaying is Nationwide limit you to £500 per month, which is a lot but if you have more available, you cannot go beyond this (without incurring the 3% fee on whatever you overpay). One workaround that I read on here was by shortening the length of the mortgage you can increase your normal monthly payment, then still have the flexibility to overpay £500. An interesting proposition that just occurred to me while playing with the repayment calculators - hypothetically, if you could secure the new mortgage (and assuming enough equity in the house) to have both at the same time, could you cut your mortgage term to, say, 1 month (:rolleyes:) and pay it off, therefore without incurring the penalty...

Many thanks

Anon

firesidemaid · 12 February 2009 at 4:49PM

we do both too - keep reducing the term (in years) on the mortgage and overpay too.

check what nationwide charges to vary the term - maybe change it so that you at least pay off per month what you know you can afford - then any overpayments will be another 6k bonus.

the other thing is your penalty for 'get-out' probably goes down each year - see where rates are/what you fee is in the next 'mortgage' year.

the other thing is as 5 year fixes go, you have a good deal - i presume you took it out for the security.

Anon · 14 February 2009 at 5:14PM

I checked with Nationwide, apparently you can vary your payment term shorter or longer as often as you want, without fee (something to do with FSA/government rules). If that is the case, it makes sense to reduce the term down to take into account my regular overpayment (therefore 10 years would bring the monthly payment up to what I am paying now with regular payment and overpayment combined), plus would still have flexibility for another £500 per month. The penalty is a constant 3% for the first 5 years.

What do people think of my scenario above - if you can vary your term as often as you want, and with no limit, could you reduce the term to 1 month to get out without the redemption penalty (assuming you could get the money!)? Also if you did suddenly come in to some money and were able to pay off the mortgage within the 5 year fix period, is there any scenario where you would not have to pay the early redemption penalty?

Anon

Leave Fixed Rate Early, Switch to Offset Account - FD appears best option?

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