Offset mortgage dilemna.

shadders_2

I have an offset mortgage with a mortgage rate fixed at 6%. The capital is £130K. If it were possible to offset the whole amount I would have three choices a) to repay all bar £1 of the mortgage with no penalty, b) to continue paying at my current rate and reduce the capital by about £8K a year as the over-paid interest comes off the lump sum annually or c)reduce my payments to match the amount that isn't offset, thereby reducing the payment to 0. c) would leave me with the same £8K to invest as I choose. I want the money to still be available so which is the better option out of b and c?

silvercar

b) has the disadvantages that you don't get the benefit of the monthly repayments until the annual reduction in the balance, so you are losing a bit of interest on the repayments.(b) also means that your balance is reducing so after a few years you would have less than £130k to withdraw.

Trying_to_be_good

I don't really understand the 'options' you've set out!

Is this a repayment mortgage, or interest only?

If you have enough savings to offset the whole amount, why not just do that and have the mortgage payments paid out of the offset account, thereby always maintaining a nil balance on the overall mortgage? You can then have a totally separate account for 'new' money, e.g. earnings.

getmore4less

We have our offset with Barclays and get monthly statements

We have set our mortgage end date to the latest date I would like to retire.

We have continued to have the mortgage run on a repayment schedule(but can get the overpayments back to the full original borrowings) what this does is give me a reducing ballance that I could revert to if I took out all the offset funds and still pay off the loan comfortably with the current payment(actualy can borrow back some of the overpayments as well)

So option b(ish). This gives an onging visibility of a sensible amount I could use for other purposes without stretching(the current mortgage payment gets diverted to long term savings/investments so is not spent)

The problem with option c is that if you see the full amount at all times so you have to work out your payment or sensible borrowing level and still be able to pay it off on target.

On my current schedule if I used all the offset funds I would still be overpaying, if I took out the full amount I would need to increase the payment by £200(30% ish).

100% offset maintaining the current payment the ballance reduces to zero 80month early.

The reality this is just suffling money around accounts but I like the idea of having access to substantial funds at a resonable rate and the monthly visibility of a sensible max, which is reducing is a reminder, that is still have to be paid back.

getmore4less

silvercar wrote: »

b) has the disadvantages that you don't get the benefit of the monthly repayments until the annual reduction in the balance, so you are losing a bit of interest on the repayments.(b) also means that your balance is reducing so after a few years you would have less than £130k to withdraw.

With offsets the ballance reduces imediately any payments are made so there is no loss of interest.

reducung the amount you can borrow can be a good thing because if you have a target date to actualy pay off the debt you don't want to borrow too much, the longer you leave it the bigger the payment will get or the less you should borrow for a target payment.

eg
£130k over various periods @6% and max borrowing based on a £1kpm payment
5 £2500 £52k
10 £1450 £90k
15 £1100 £120k
20 £930 £140k

shadders_2

silvercar wrote: »

b) has the disadvantages that you don't get the benefit of the monthly repayments until the annual reduction in the balance, so you are losing a bit of interest on the repayments.(b) also means that your balance is reducing so after a few years you would have less than £130k to withdraw.

You're right about losing interest on the payment, I hadn't thought of that.
I'm not sure you're right about the second part. I would have £130K in the offset savings part of my account. The balance of the mortgage would be reducing steadily but the savings would continue to be available to me. I guess what *would* happen is that once a year as the amount I owe on my mortgage reduces by the £8K I've put in, as long as teh capital sum is covered 100% it would free up the surplus £8K in the savings to withdraw and reinvest elsewhere?

Trying_to_be_good wrote: »

I don't really understand the 'options' you've set out!

Is this a repayment mortgage, or interest only?

If you have enough savings to offset the whole amount, why not just do that and have the mortgage payments paid out of the offset account, thereby always maintaining a nil balance on the overall mortgage? You can then have a totally separate account for 'new' money, e.g. earnings.

It's interest only.
If I did that, would the amount I owe on the mortgage go down significantly?

Thanks for the replies.

Locoblade

shadders wrote: »

It's interest only.
If I did that, would the amount I owe on the mortgage go down significantly?

Thanks for the replies.

Yes, it would go down by whatever you pay it per month, because there's no interest to pay, so all repayments reduce the capital.

For example, say you owe £130k and your offset has just hit £130k to match it. You lender will still require a repayment from you each month, so you simply withdraw that repayment from the offset (say £1k) and use it to pay the mortgage that month. You now have the £1k from your monthly wage (that would have paid the mortgage) spare, plus money spare you would have normally put in as an overpayment into the offset, so you can invest/save it etc. Now in month 2 you have £129k left on the mortgage and £129k left in the offset. You then repeat this process for another 129 months and you'll have paid off the mortgage, emptied the offset pot but invested / saved £130k + "130 x overpayment" + interest.

getmore4less

shadders wrote: »

You're right about losing interest on the payment, I hadn't thought of that.
I'm not sure you're right about the second part. I would have £130K in the offset savings part of my account. The balance of the mortgage would be reducing steadily but the savings would continue to be available to me. I guess what *would* happen is that once a year as the amount I owe on my mortgage reduces by the £8K I've put in, as long as teh capital sum is covered 100% it would free up the surplus £8K in the savings to withdraw and reinvest elsewhere?
.

You don't do it that way you keep the ballance 100% offset and move the surplus unless your lender pays interest on the surplus.

Effectifly once 100% offset you make the payments out of the offset pots.

The imprortant thing is to not lose sight of the fact that IF you use the offset savings you need to fund from income again so having a budget that still has a notional mortgage entry makes sense.

simch

Hi, long time reader, first time poster here.

Slightly off topic but connected maybe to this. My neighbour has an offset mortgage, since he had an inheritance 2 years ago. I wont say who its with, but its a mainstream one.
Anyway, he asked me to read through the smallprint a bit, in light of the economic climate just now.

He has £202k mortgage, offset by £122k savings maenain he currently pays interest on the £80k net liability.
But, it transpires if his lender goes pop, he will have £50k of his £122k covered only, and will lose £77k, and yet still be liable for the whole £202k loan.
So basically, although they offset in the normal cause of business, they wont if it all goes bad!

Sorry of it seems obvious to all you that have them, but he was surprised and it showed his a potential risk he had never dreamed of before.

Of course he can pay the capital sum down and end up with a net £80k and no savings, but as his whole idea with this was to offset and keep his options open, he woudl then lose those options.

So he is consdideing his options, trying to limit his liabilities and maximise his liquidity. I suggested offset just £50k for now and move the balance of capital to another lender in the short term..?

Locoblade

Thats not correct for the vast majority of banks though. In most cases it's debt - assets = net amount owed / owing. As youve presumably got a mortgage that's bigger than the savings / offset pot, then you'll always end up owing some, so the £50k limit on savings doesn't apply.

simch

I think in the Receivership or Liquidation, there is no right of offset or contra'ing off. He called them to confrim and they did!

Worth checking up on maybe.