A brain wave on saving money on my offset mortgage????

Donna410

Captain_Mainwaring wrote: »

Oh dear.

Actually you would have come out of it better off if you had taken the money from your savings and purchased you car for cash. You will never win with a car load, no matter what they try and tell you.

Have you read all the clauses of the car loan?

At the time I didn't have the money in my savings!

Cat695

If the loan is secured on the car (as your saying car loan) then i think you'll find its illegal to sell the car and not give the money directly to the AA as they actually own the car

But i'm only assuming here as you keep saying car loan (and assumption is the mother of all F**k ups)

Donna410

Cat695 wrote: »

If the loan is secured on the car (as your saying car loan) then i think you'll find its illegal to sell the car and not give the money directly to the AA as they actually own the car

But i'm only assuming here as you keep saying car loan (and assumption is the mother of all F**k ups)

It's a personal loan but when asked what was it for, I said it was for a car.

Locoblade

Reading again, the bit you're missing is related to your monthly payments.

If you keep the loan, you've got to pay roughly (£15200/36=) £430 a month to the AA. If you pay the loan off now, you could put that £430 a month into the offset instead. That £430 a month will eventually deposit £15200 into the offset over 3 years, as opposed to £14,000 if you put it in now. Without all your mortgage and loan figures, its impossible to calculate the savings/differences, but as an example, take a £100k mortgage over 25 years -

If you put £14k into the offset at the start, you'll owe £91400 at the end of 3 years plus have £14k in the offset pot, so a net debt of £77400 if you subtract the pot from the loan amount. If you start the offset pot at zero but put in £430 a month instead, you'll end up with £92,500 owed but with £15200 in the pot, so a net debt of £77300. In this instance, a £430 a month leaves you around £100 better off overall if you carry on paying the mortgage at the same rate each month, if you allow the overpayments to drop the monthly though as you've mentioned you'd like to do, then the difference goes up to around £250.

Locoblade

Donna410 wrote: »

This is from FD website for a 6% variable offset mortgage:

your 1st Account and day-to-day savings benefit from the equivalent of 6.00% gross, 6.17% AER variable on everything you save providing your total credit balances do not exceed your total borrowing (rate based on the offset Mortgage standard variable rate, currently 6.00%)

As I have the 5.49% fixed rate, the girl said I would get 7.76 gross, which is 6.17% after tax. She said it is not taxed as it is offset to a mortgage???!

It also says on their website 'pay no tax on your savings - the higher your tax band, the more you stand to benefit' (http://www.firstdirect.com/mortgages/offset-overview.shtml)

The annual interest rate on the car loan is 6.85%

You can't take the figures from the 6% mortgage and apply them to your 5.49% mortgage, the girl on the phone has either got confused or is not registering that the figures she's given you are related to a different mortgage.

What you need to grasp is that however the figures are cooked or however its worded, you do not actually earn ANY interest on savings in an offset, all you do is save paying interest by putting those savings against your mortgage. In effect you are putting all your debts and assets into one pot and just paying 5.49% on the remainder, so if your assets can earn 5.49% or above (after tax) elsewhere, they will be better off elsewhere. Likewise if your loan which has generated these savings is costing you more than 5.49% (no tax involved), then the money is better off paying the loan off. As your loan is costing you 6.85% which is higher than 5.49%, your money is better off paying the loan off

Donna410

Locoblade wrote: »

Reading again, the bit you're missing is related to your monthly payments.

If you keep the loan, you've got to pay roughly (£15200/36=) £430 a month to the AA. If you pay the loan off now, you could put that £430 a month into the offset instead. That £430 a month will eventually deposit £15200 into the offset over 3 years, as opposed to £14,000 if you put it in now. Without all your mortgage and loan figures, its impossible to calculate the savings/differences, but as an example, take a £100k mortgage over 25 years -

If you put £14k into the offset at the start, you'll owe £91400 at the end of 3 years plus have £14k in the offset pot, so a net debt of £77400 if you subtract the pot from the loan amount. If you start the offset pot at zero but put in £430 a month instead, you'll end up with £92,500 owed but with £15200 in the pot, so a net debt of £77300. In this instance, a £430 a month leaves you around £100 better off overall if you carry on paying the mortgage at the same rate each month, if you allow the overpayments to drop the monthly though as you've mentioned you'd like to do, then the difference goes up to around £250.

Here are my figures:
Mortgage = £88000 over 25 years on a fixed rate at 5.49%. Monthly payments roughly £560.
AA Personal Loan = £14000 over 48 months at 6.8% APR. Monthly payments are FIXED at £333 .

Scenario 1:
I keep the car for the loan term. At the end of the term I have paid the AA £159200 and have a 4 year old car probably worth around £6000 if I’m lucky! My mortgage payments stay at £560 and I don’t overpay my mortgage. I lose out on £9920 due to car loan...
Scenario 2:
I sell the car at £14000. I pay off the car loan to the AA, probably owing them more than £14000 due to early repayment fees. My mortgage payments stay the same at £560 and I don’t overpay my mortgage. I start a cash ISA totalling £3600 for the year. Interest I receive in Year 1 = roughly around £180.
Scenario 3:
I sell the car at £14000. This money, from the sale goes into an offset savings account. The mortgage monthly payments are reduced from £560 to £480. However I keep the payment the same. I overpay my mortgage by £960 in Year 1, slightly more in year2,3,etc. In year , I have overpaid my mortgage by nearly £4000. The AA loan has been paid off and I still have the £14000 in the savings account.
I’m sorry but I just cannot see how Scenario 2 is a better option than 3?!

Locoblade

Scenario 2 should be sell the car, pay off the loan and pay £333 a month into the offset. Bringing an ISA into the equation just clouds the issue.

Im not sure how it can be explained to make it click, but imagine you had a loan from the AA for the entire £88k @ 6.85%. Would you put that £88k you've borrowed into the offset on the mortgage to save interest charged at 5.49%, or would you pay the loan off to prevent yourself paying 6.85%? Of course you'd pay it off because its a choice between paying a loan at 6.85% over 4 years compared to paying a loan at 5.49% (over 4 years too if you wanted)

As to your figures: -

Scenario 2 (pay off loan and put £333 a month into offset)
Amount left on loan after 4 years £78,723.14
Amount in Offset after 4 years £15,984.00 (not £15200 as you said earlier, as its over 4 years)
Overall Debt after 4 years £62,739.14

Scenario 3 (keep loan @ £333 a month over 4 years and put lump into offset)
Amount left on loan after 4 years £77,220.83
Amount in Offset after 4 years £14,000.00
Overall Debt after 4 years £63,220.83

Both end up paying the same per month, i.e. ~£560 on the mortgage and an additional £333, either to pay the loan or pay into the offset. In this case scenario 3 is £481.70 better than scenario 2.

Locoblade

Donna410 wrote: »

Scenario 2:
I sell the car at £14000. I pay off the car loan to the AA, probably owing them more than £14000 due to early repayment fees. My mortgage payments stay the same at £560 and I don’t overpay my mortgage. I start a cash ISA totalling £3600 for the year. Interest I receive in Year 1 = roughly around £180.
Scenario 3:

I sell the car at £14000. This money, from the sale goes into an offset savings account. The mortgage monthly payments are reduced from £560 to £480. However I keep the payment the same. I overpay my mortgage by £960 in Year 1, slightly more in year2,3,etc. In year , I have overpaid my mortgage by nearly £4000. The AA loan has been paid off and I still have the £14000 in the savings account.

The other problem with this is you're not comparing like with like amounts. Can I suggest you ignore ISAs in your comparisons because there's the £3600 limit on them, and as you have £333 a month to save (£4k a year), you've ended up ignoring £400 per year of investment in your Scenario 2 calculations, making the savings option look bad. Even if you decide to pay your maximum into an ISA and then save that other £400 in a non ISA, you're still comparing a savings pot over 4 years of £16k paid in, compared to £14k from your loan, i.e. not like for like.

As you can see here, for the loan money to be profitable against the savings, it needs to earn £2000 of interest and increase to £16k before it even catches up with the monthly £333 option! The savings are also earning interest though, if you pay £333 a month into a 6% ISA/savings account that too will accrue around £2000 interest over the period, meaning they're now worth around £18k, so straight away you can see where your apparent (£18k-£14k=) £4k benefit with one calculation has been lost in the comparison, because you've not taken the above into account.

Donna410

Locoblade wrote: »

Scenario 2 (pay off loan and put £333 a month into offset)
Amount left on loan after 4 years £78,723.14
Amount in Offset after 4 years £15,984.00 (not £15200 as you said earlier, as its over 4 years)
Overall Debt after 4 years £62,739.14

Scenario 3 (keep loan @ £333 a month over 4 years and put lump into offset)
Amount left on loan after 4 years £77,220.83
Amount in Offset after 4 years £14,000.00
Overall Debt after 4 years £63,220.83

Can you show me how you did the workings? i.e. how do you work out in Scenario 2 the figure 78,723.14

Locoblade

I put it all into my spreadsheet (see sig).

You can put it into an online calculator if you want to cross check it, although not many support monthly offset overpayments as an input type

You could put the figures into this one and it would give you the overall debt after 4 years figures though, which is the figure that tells you overall which option is cheaper.
http://www.the-mortgagestore.co.uk/mortgagecalculator.asp
just select monthly repayment of £333 or one off payment of £14000 in month 1, and then look at the report for end of year 4, its roughly the same as my figures above.

If you want to work back to the mortgage remaining figure of ~£77k, just think of an offset payment as exactly the same as an overpayment, but the capital is kept seperate and doesn't come off the capital owed figure, so just add the amount of capital you've invested (£14k or £15984 depending on which option you follow) to the figure that website gives you after 4 years, and that gives you comparable figures to mine.