FTB offset mortgage advice

secondtoughest

Hello

I'm looking for some advice on mortgages. I'm currently saving to buy, and when I do I want to be able to overpay or make lump sum payments to my mortgage. I'm going to be buying on my own and I'm open (but not thrilled) about the idea of a lodger and willing to do a second job.

From Jan 2009 my SOA will be as follows

Incoming

Flat income per month: £1500
(With overtime this goes up to £1600-£1800 but the current economy has stopped most of this unfortunately)

Outgoings:

Combined rent/household bills: £300 (I rent a room)
Food: £200 (includes eating out)
Fuel: £80
Phone £50 (iphone contract I can reduce in April to £35)
Cinema: £12

£1500-£642 = £858

The rest can more or less go on savings but I do have some yearly costs such as car insurance (£300), car tax (£200), MOT/service (£300), holidays (£ a lot but paid for with my previous overtime), presents (£200), clothes (£300).

Currently I save around £500 a month but I could save more if I really pushed myself. Obviously some months require more outlay than others.

I looked on the Nationwide website and they say I could borrow around £90,000, which would give a mortgage of around £630 a month. As I live in the south west, circa £110-£120k (savings + mortgage) isn't going to get me much. I do prefer flats (I feel safer, I don't like too much space) but I know they don't retain value.

Do any first time buyers have any experience of offset mortgages? Is it practical from my SOA? I like the idea of being in control of my mortgage i.e. I don't want to just 'exist' for 25 years, I'd rather get it paid off. I'm 28, btw.

StuartGMC

Welcome to MFW!

You've indicated some of your scheduled costs but there are others like utilities, council tax, buildings & contents insurance etc in addition which you'll need to account for, other savings such as annual amount towards replacement car and such, so please think these things through too in your estimation of costs. Do you have a household budgeting spreadsheet as this will be a great help?

Do you have your emergency funds saved separately somewhere between 3-6-9 months income depending upon the nature of your job?

Offsets can work but you do need the reserves to make them attractive as their rates (if not offset) can be less competitive than other products. Do consider whether you want to offset your current account and your savings, some also allow you to offset Cash ISAs (they won't earn interest but remain in the tax free wrapper).

Other products do allow you to overpay too. In our case the overpayment has been the key to reducing mortgage term until our mortgage dropped to one where savings would offset at least 30%. Now with OP and offset it is helping a lot, and the way interest is calculated daily now means offsets and indeed OPs have much more immediate effects.

(We have only ever bought one property once the prices had been accessible in 1994 but we were only just coming out the recession then; we didn't offset until 2006, but today I think we could have taken advantage from about 6-8 years into the mortgage. Entering the market when we did as FTB we actually went straight in a bought a 4-bed detached, whereas in 1989-1992 we couldn't afford a 2-bed mid-terrace. I would recommend you look very closely at the market as you may be able to buy something with more "resale" possibility?).

You may want to run a number of comparisons of different products to gauge which is best for your requirements. You need to look at the interest rates on the mortgages vs.that earned on savings (ISAs tax free, others interest-tax) etc

My thread gives more history to where we are now and our thoughts.

HTH a little, and do keep up a thread here once you've taken the plunge.
good luck

JimmyTheWig

My gut feeling is don't go for an offset mortgage for your first mortgage.
As Stuart has said the rates are generally more than for non-offset mortgages. Unless you're going to have serious amounts of money in the offset it's not worth it.
Generally speaking you can make overpayments of up to 10% of the balance of your mortgage in any one year without a penalty. So as long as you've got some money that you are happy to tie up then this is an ideal option.

secondtoughest

Thanks for the replies.

So essentially I can overpay while still on a fixed rate? I assumed that there were penalties for this? I always thought that paying off the mortgage would be the cheaper option long term.

I'm sure I'll have lots to ruminate on whilst I'm saving hard.. : )

Dithering_Dad

I'm with the two other contributors, I wouldn't bother with an offset mortgage on your first purchase. Typically it takes a couple of years after buying a place to settle down financially, especially if you're doing any work or buying fixtures, fitting and furniture. You'll probably change your mortgage product after 3 to 5 years anyway and that would be the point to look at an offset, especially if you have been able to save a decent amount of cash in the meantime.

The first thing I'd look at once you buy your place, as StuartGMC has suggested, is to make sure you have adequate emergency savings then I'd also suggest you made sure that you have adequate retirement savings - your mortgage will be paid off anyway after 25 years, but if you don't pay into a pension you'll spend your 'golden years' in poverty.

Good luck with the house purchase, it looks like they're becoming more affordable as each day passes!

dimbo61

Agree with everything dithering dad and stuart have said
If you want the security of knowing how much you will be paying out each month for a good few years then look at long term fixed rate deals of at least 3 and better still 5 years.
This gives you the chance to build up the equity in your property and clear some of the mortgage debt.
2 year deals seem to fly by and as people have discovered they have paid little off there mortgage and with the current downturn in property prices are sometimes in negative equity or looking for 95/100% mortgages.
A mortgage is usually for 25 years do you want to remortgage 12/13 times !!

dimbo61

Look for fixed rate deals that allow 10% or in Nationwide,s case £500 a month overpayments without penalties.
Also save into cash ISA,s to build up savings and emergency funds
GOOD LUCK