repaying offset tracker mortgage

pammsy

Please can somebody out there assist me. My son is about to move to a First Direct offset base rate tracker for £225,000

My question is this:
If the interest part of this is say £350 per month and he pays £1,350 per month does his capital loan reduce by £1,000 to £224,000. This would therefore mean that each month he was paying even more off the capital sum because of an interest reduction due to a smaller sum outstanding each month.

His current fixed rate require £1,350 per month and he is keen to retain this and reduce the sum outstanding.

glockdanny

I think in general terms the amount of capital paid off per month is structured in a way that you pay very small amounts in the early years of the mortgage and large amounts in the latter years. It's all to do with interest applied to outstanding capital. Obviously if you start off owing £225K, you're going to be paying an awful lot of interest - so if you chip away at the outstanding capital, you then have less interest to pay, so if you keep the monthly payment the same, then the longer it goes on the more and more capital you pay each time as part of your monthly payment, and the less and less interest you pay.

Does that make sense?

At a guess, I'd say his during his first year he'd only be off about £2K's worth of outstanding capital. Very rough guess, although the actual figure probably wouldn't be wildly different. After all, if he was paying £1K worth of capital off a month, he'd have it paid off in 18 years and 9 months wouldn't he? The lucky so and so

pammsy

I think I have misled you. His is a tracker, offset, lifetime mortgage which is designed for interest only repayments but he can pay off as much capital as he likes. The question is should he save it and have the interest on savings set against the interest on the loan (which I think is tax free) or should be just pay the extra off the capital sum thereby reducing the capital sum and the amount of interest due each month.

Mr._Nice

It makes absolutely no difference in terms of interest paid (that's the whole point of offsetting afterall). So whether to keep the money in the savings account, use it to reduce the mortgage account (remember, he can remove money from here at any time, up to the original mortgage amount, so it's no more "locked up" then in the savings account), or indeed whether to simply leave it in the current account, is entirely psychological.
Is he the type to see any money lying around in the current account as "spending money"? Then shift it into the savings and/or mortgage every month. Want to get the satisfaction of "feeling" that you are making headway into the £225k mortgage debt? Then put it in the mortgage account. As I said, it makes no difference to his net financial position and/or interest payments, it's all about how he thinks & feels.

[edit]Further to glockdanny's comment, on a standard 3.49% rate repayment mortgage, ~5800 of capital would be paid of in the first year, and about ~12200 total by the end of the second year.

Blofeld_2

There is no real difference between the two options as in one you are reducing the loan and in the other you are increasing the cash offset. The net debt outstanding is therefore the same.

I would however recommend increasing the cash account as this maximises flexibility in that it allows you to quickly draw upon this cash if you wish to use it in the future.

pammsy

Thanks to all of you. What I have since discovered is that with First Direct (I don't know about any others) he can reclaim any over payments up to the amount of the capital sum at any time.

I think he has been lucky to get such a deal at .49 over base rate and as many overpayments as he likes.

glockdanny

Hi again. No, you didn't mislead me - I didn't understand it. Apologies:o