Offset tracker mortgage where savings balance mortgage loan... What should we do?

Tweetinat

Hi,

[Just realised I posted this on another forum category but meant to put it on this one.]

I'm having a strange day today and can't for the life of me figure out what's the best thing to do so hoping to get some good advice from my fellow MSErs.

The Facts

• We have a lifetime offset tracker mortgage at BR +.79, so as of today our new mortgage rate will be 2.79% (there is no floor on our deal).
• Our current mortgage balance outstanding is £72,500 and the amount in the offset savings account is £72,500.
• We currently pay £1600 per month as well which comprises around £330 as a "minimum" we're required to pay, and £1270 overpayment.
• As the mortgage reduces on a monthly basis, we withdraw the equivalent amount out of the savings as we get no interest on a credit balance.
• We're both higher rate tax payers but I hope to go on maternity leave sometime next year and would plan for a year off.

The Confusion

We also have other, instant access savings and don't feel that we need access to the mortgage savings of £72,500 anymore, so until the last month or two we were thinking of just paying off the mortgage in one lump sum and having done with it.

However, with the mortgage rate now lower than the net interest that we could gain on this balance, we were not sure whether to withdraw the entire amount of mortgage savings and 'un-offset' ourselves for such a time as the mortgage rate rises again.

The Questions

• Should we just stay 'as-is' and do nothing?
• Should we pay off the mortgage completely and save what would have been the monthly payment (£1600) in a high-interest account?
• Should we keep the mortgage but withdraw the savings (£72,500) in the offset account and invest in a high-interest savings account?
• If we do the latter, should we then pay the minimum amount monthly (£330) or keep overpaying (£1600)?

Any help is most gratefully appreciated! Thanks in advance,

Tweetinat

sdooley

Have you set up an ISA for the year? Small start but a good idea.

What's your pension provision like? You could draw down some of the mortgage to fund contributions but you'd have to be willing to take the risk that shares don't get even worse.

Given that you are taking at least a year for maternity leave (presumably with some pay but not as much as now), it would be a good idea to keep your cheap line of credit open. Are you allowed to keep the full balance in there so you don't incur any interest for now? You may want to go part time for a while or have another child and the facility could come in useful.

For now, I'd suspect you would find it difficult to get savings accounts elsewhere that would, after 40% tax, pay more than 2.79%. Even if they did, would it be worth the hassle and risk for an extra £100 a year of interest or whatever? So maybe leave matters as they are for now (other than taking out any ISA or pension contributions) but when you go on leave you might withdraw some more to put in high interest savings - not in funny banks though. Only pay the minimum on the mortgage though.

Another reason keeping your mortgage in place would be handy is if you have to move - provided it's portable.

You are in a nice position - be happy to have this dilemma!

StuartGMC

We're offsetting but with a Natwest rate of 4.95% we'll continue to focus to hit 100% offset next summer (much less capital than you!) then get the emergency savings in place and pay off. ASAP Just our preference when considering our own plans which are in my thread here.

I think two items not highlighted that can have a bearing on your plans are:

1) If the lender got into difficulties they would automatically payoff the capital and return any difference to you. However, one hopes none of our major lenders is in this category now!

2) In the event that you/your OH were made redundant, your savings are far in excess of the £16k so you would of course not have access to any means tested benefits, until you had depleted funds.... your call on the probability of this of course but it would mean you would not be 100% offset, and they will not be happy if you pay off when made/hearing of redundancy as this is "deliberate reduction in assets"

As sdooley notes, you have a nice problem, but, like all others here, it is a very difficult time to call regarding job security, interest rates (say 2010 on), market growth (from early 2010?) etc.

I think you need to run a few scenarios and look at how different options would affect their outcome.
Best wishes for all the financial and family aspects you note.

Tweetinat

Thanks for the input sdooley!

Have you set up an ISA for the year? Small start but a good idea.

We're both fully topped up for our ISAs this year but will definitely be sure to put some money aside to do the same next April.

What's your pension provision like? You could draw down some of the mortgage to fund contributions but you'd have to be willing to take the risk that shares don't get even worse.

Ashamedly very poor MrTweeti has a good pension but I only have a work one which I don't contribute any additional funds to. It's definitely something for me to consider though...

Given that you are taking at least a year for maternity leave (presumably with some pay but not as much as now), it would be a good idea to keep your cheap line of credit open. Are you allowed to keep the full balance in there so you don't incur any interest for now? You may want to go part time for a while or have another child and the facility could come in useful.

Yes, we can keep the full balance in there and we're not quite sure yet what's going to happen once we have babytweeti so this sounds like a good plan.

For now, I'd suspect you would find it difficult to get savings accounts elsewhere that would, after 40% tax, pay more than 2.79%. Even if they did, would it be worth the hassle and risk for an extra £100 a year of interest or whatever? So maybe leave matters as they are for now (other than taking out any ISA or pension contributions) but when you go on leave you might withdraw some more to put in high interest savings - not in funny banks though. Only pay the minimum on the mortgage though.

Yep, this was the conclusion we finally drew too - a couple of extra hundred isn't really worth the hassle! But we will probably look to reduce our repayment back down to the minimum though now... It just is so hard to do when we'd planned to pay it all off over 4 more years and now that timeline is going to increase!!

Another reason keeping your mortgage in place would be handy is if you have to move - provided it's portable.

Yes, although not on the agenda just yet, we may have to start thinking about that should we decide to grow the family after #1 is here :-)

You are in a nice position - be happy to have this dilemma!

Cheers :-)

dimbo61

Any money put into a pension in your name would give you 40% tax relief
so keep filling a cash ISA each year for both of you and pay the £330 a month for the mortgage interest ( payment ) then build up £7200 to put into ISA,s in april.
and put any left into your pension
Kids cost a large fortune so build up your savings ( easy access ) to help maintain you lifestyle once the new arrival is here and pay for childcare.
GOOD LUCK

Tweetinat

Thank you StuartGMC!

I think two items not highlighted that can have a bearing on your plans are:

1) If the lender got into difficulties they would automatically payoff the capital and return any difference to you. However, one hopes none of our major lenders is in this category now!

That's interesting - I didn't realise that!

2) In the event that you/your OH were made redundant, your savings are far in excess of the £16k so you would of course not have access to any means tested benefits, until you had depleted funds.... your call on the probability of this of course but it would mean you would not be 100% offset, and they will not be happy if you pay off when made/hearing of redundancy as this is "deliberate reduction in assets"

Unfortunately, OH was just made redundant* when we got back from Honeymoon in September after they witheld his salary, so we've already had to face this. Luckily for him though, he managed to get a job just a couple of weeks later :T As for me, we've just had cuts at my work and (for now at least) I'm secure. All being well, we won't have to deal with this again anytime soon, but it's a valid observation and definitely worth considering for others who may be looking to learn from this thread!

As sdooley notes, you have a nice problem, but, like all others here, it is a very difficult time to call regarding job security, interest rates (say 2010 on), market growth (from early 2010?) etc. I think you need to run a few scenarios and look at how different options would affect their outcome. Best wishes for all the financial and family aspects you note.

Yeah, I think I may do that - did out the spreadsheet and see what looks best :-) Any many thanks for the Best wishes!


* Actually, it wasn't quite redundancy. They decided not to pay him for a month (along with a selection of others), told him they couldn't guarantee next month's salary and then told him he had to accept a £15k paycut. We're currently going through an Employment Tribunal for an unfair and constructive dismissal case which is taking its time 'cos they company has gone into liquidation to avoid creditors but then re-employed everyone else and continue to trade as before. Very un-ethical but luckily for us they've made lots of mistakes in doing this and our solicitor and barristers believe we have an excellent case.

Tweetinat

Thanks dimbo61

dimbo61 wrote: »

Any money put into a pension in your name would give you 40% tax relief
so keep filling a cash ISA each year for both of you and pay the £330 a month for the mortgage interest ( payment ) then build up £7200 to put into ISA,s in april. and put any left into your pension
Kids cost a large fortune so build up your savings ( easy access ) to help maintain you lifestyle once the new arrival is here and pay for childcare.
GOOD LUCK

Really appreciate the advise and good to hear another 'vote' for topping up the pension. I really must look into it - I don't know why I've not done that before really!