Lump Sum or Offset Mortgage ???

toppy007

My wife and I recently cashed in a number of endowment policies that we had running for a number of years and we have invested the money in Cash ISAs and savings accounts.

We are currently on a fixed mortgage (5.75%) that is due to finish in September 2009. I know it’s early to be looking but I would appreciate people’s advice on whether we should pay off a lump sum next year (reduce term to 14years) and go for another 2/3 year fixed/discounted mortgage or whether to look at an Offset mortgage.

This will be our situation in September 2009:

Savings
– Current account = £56,000
– ISAs = £7,600

Earnings
- Me = £50,000
- My wife = £50,000
- Take home = £5,200
- Balance in current account at the end of the month ~ £700

Mortgage
- £279,000
- Outstanding term - 18 years
- No other loans or other debts
.

We would need to dip into our savings in 4 years time when my first son goes to University to pay for fees and the like. When he finishes my other son will also go to Uni.

Locoblade

If the rate is the same for both products, whether you offset or pay a lump off the capital and go with a conventional repayment remortgage won't make any financial difference, you'll still end up paying interest on the net same amount of capital.

The advantage of offsetting is you have easy access to that money again should you need it. If you pay it off in a lump sum then realise you need the money, you'd need to remortgage again to release some equity.

Offsetting also gives you another option when paying off at the end. When the offset savings equal the amount on the mortgage, you can choose to either pay off the mortgage there and then with the money in the offset, or just pay the monthly repayments from the offset savings each month. If you did the former you could pay off the mortgage in the same time as if you'd used the money to reduce the capital then gone conventional repayment, the latter will stretch out the time you have the mortgage but won't cost you any more interest because the capital is wholly offset, it just leaves you again with the option of accessing the money for a few more years when you'd otherwise have paid it off and closed the mortgage.

The IF is the issue though, at the moment there are some fairly competitive offset mortgages but that may not be the case by this time next year.

dimbo61

You cant do anything till the summer of next year except make the most out
of your savings IE fill your ISA,s and get the best rates.
shop round next summer and use a whole of market broker to see whats available. I have an offset mortgage which I think is brilliant !
You have nearly a quarter of your mortgage in savings and the offset option might well work for you.
This gives you the best options with supporting your sons at uni and clearing that mortgage years early ( less interest ! )
GOOD LUCK

londonbluebird

as a high rate tax payer you should definitely consider an offset mortgage especially with large amount of savings in relation to mortgage balance.

the tax effect is quite significant as even if you were to get another 5.75% fix that would equate to you getting a saving rate gross of around 9.6%!

the other benefit is you can pull out the uni fees from your offset account when you need them but in the meantime they will help lower your interest payments.

also, given that you have approx £700 a month left over - if you leave that in your offset account you will in effect be overpaying your mortgage every month. this will knock lots of interest and years off your mortgage.

getmore4less

Income £5200k+ per month

Mortgage £2100pm savings £700pm spends £2400pm after mortgage.

I think you could probably review the value you get from your spends and see if there is room for some more savings. It is very easy to just waste money when you have more than you need.

I would look at retirement provision as well as the mortgage it may effect the mortgage plans.(eg: you have good pensions producing lump sums)

Offset look good you want some flexability on cash flow for UNI and are HRTax payers.

Fill those ISA's there is a chance you will benifit from the long term tax relief especialy when you retire (age allowance).

You will need to be thinkinga bout alternative investements sooner rather than later, with the £700 and a bit more saved and pay rises you are looking at the mortgage 100% covered in 10-11 years and then having £2800+ a month to save.