Leave Fixed Rate Early, Switch to Offset Account - FD appears best option?

Anon

I agree it is a gamble paying the ERC, and it also goes against the grain paying it, but in our situation looking at the numbers it appears that we will save overall over the remaining period (even if rates rise) because of offsetting and having savings now that we can effectively pay off/offset. Not taken action yet, but will have to move quickly as you never know how the next rate announcement may affect the pricing of the deal.

Anon

kazd

You might as well start the enquiry because once you do that you have booked your rate. You don't have to take it up but at least you know the rate is yours should you choose to go ahead.

sharrison01

hi anon,

in my opinion, youre mad to pay these exit fees on the hope that over 5 yrs you will get them back as rates will stay low???

if you think about interest rates at the moment and the state of the economy, the government will want to raise interest rates at the first possible opportunity. they are getting more and more in debt but at low interest rate levels that will be fairly fixed. this means that a rise in interest rates will allow the government to then lend money through bonds at a higher interest rate and service their debt which is fixed at a lower rate.

furthermore, tens of thousands of people out there have just rolled their fixed rate deal onto the SVR as they are saving some small amount retrospectively per month or as their ltv is now not good enough to get a good deal. this means that a sniff of the interest rate cycle turning will prompt lenders to raise the rates for fixing and as the SVR will also be going up, the banks will want to recoup some of their losses from the past couple of years.

it really does amaze me that somebody can make such an assumption on interest rates when a couple of years ago the thought that rates would now be at 1% was a joke. im not sure why anyone would be so sure that rates will not go all the way back in equally as quick time???

you have to also note that during every recession or depression or the past 100 yrs, the stock markets have had their largest directional movements upwards so should this happen, your 5yr fixed would look particularly good...

the rate at which you fixed at is also not too far from the current market for fixed mortgages so a slight upturn in the economy will raise these fixed deals and make your rate look rather good.

remember, to assume is to make an !!! out of u and me

Anon

kacee wrote: »

With regards to borrowing more than you need to pay back your existing lender, we have recently done just that with First Direct. We owed £25000, but required £75000 extra, so the £100000 was sent to our Lawyer and he paid the £25000 to the original lender and £75000 was then sent back to our FD linked account that is still sitting there until we require it.

What you will have to be aware is that FD quote you on an interest only basis, but you can ask them what the payments would need to be to pay off in X years, then make this payment. So your payments every month will be A(the interest) + B(the repayment amount for the full mortgage) - the interest from the offset linked accounts.

Hope this is clear

Thank you - did you take out the extra £75000 as an offset loan, or include it in the mortgage? I am assuming that if it is possible it is better to go for an increased mortgage, as that is then available for the mortgage term, whereas the loan is effectively an overdraft and could be withdrawn/recalled at any time.

Anon

Anon

sharrison01 wrote: »

hi anon,

in my opinion, youre mad to pay these exit fees on the hope that over 5 yrs you will get them back as rates will stay low???

if you think about interest rates at the moment and the state of the economy, the government will want to raise interest rates at the first possible opportunity. they are getting more and more in debt but at low interest rate levels that will be fairly fixed. this means that a rise in interest rates will allow the government to then lend money through bonds at a higher interest rate and service their debt which is fixed at a lower rate.

furthermore, tens of thousands of people out there have just rolled their fixed rate deal onto the SVR as they are saving some small amount retrospectively per month or as their ltv is now not good enough to get a good deal. this means that a sniff of the interest rate cycle turning will prompt lenders to raise the rates for fixing and as the SVR will also be going up, the banks will want to recoup some of their losses from the past couple of years.

it really does amaze me that somebody can make such an assumption on interest rates when a couple of years ago the thought that rates would now be at 1% was a joke. im not sure why anyone would be so sure that rates will not go all the way back in equally as quick time???

you have to also note that during every recession or depression or the past 100 yrs, the stock markets have had their largest directional movements upwards so should this happen, your 5yr fixed would look particularly good...

the rate at which you fixed at is also not too far from the current market for fixed mortgages so a slight upturn in the economy will raise these fixed deals and make your rate look rather good.

remember, to assume is to make an !!! out of u and me

Thank you for the detailed response. I would agree with you that a first response when looking at the size of the redemption is to stay put (I hate giving money for nothing!) and I could be crackers, but having done the sums as suggested on the thread, I am weighing up:

1. Currently we have a reasonable amount of money not earning as much in savings accounts (and nowhere near 5.63% after tax) - the interest saved by not paying 5.63% interest on this amount of the mortgage is equal to most of the redemption - this alone almost makes it worthwhile.
2. By bailing out, we would be able to offset monthly income which according to various online calculators shows a significant saving.
3. Potentially we could pay off all or a sizeable chunk of the mortgage in the same time frame by reducing the interest rate.

Therefore the options are:

1. Do nothing and keep the same term, overpaying £500 per month (current approach) - over the next four years we will be paying over £21K in interest and after then will have 10 years or so remaining (overpaying £500 per month reduces term from 22 to 10 years).
2. Shorten term to 4 years to effectively increase overpayments (from savings) but sticking at 5.63% - pay £13K in interest over the next 4 years (still saves money but may be tight keeping up that level of payment, particularly if anything unexpected comes up!).
3. Bail out now - take the £4k hit, effectively reduce mortgage from offsetting savings, pay around £11K in interest over the next 4 years (assuming mortgage rate is similar to what we are paying now - 5.63% rather than the potential reduced rate) - therefore in this potentially worst case (switch and interest rates go back to this current rate), we would still save around £5k over the next 4 years. The rate would have to rocket to, say, 8.5% per annum for all four years (plus £4k redemption) to equal the same amount of interest that we would be paying with option 1.
4.Bail out, take £4K hit, interest rate stays low for period (2.89%), interest would be £5k approx over 4 years.

The above does not take into account the offsetting feature which should reduce interest even more and also allow more flexibility for any other commitments.

Option four is probably the least likely as rates will invariably (or likely to) rise, but it appears that it will be possible to save the redemption from reducing mortgage amount (offsetting, so still have access), and potentially save significantly more - therefore almost convinced to progress.

Many thanks
Anon

stuarthouse

We have been thinking about this for a few weeks

+ves

2.89%
no redemption
2.89 svr
interest rates likely to remain low at least until 2010



-ves

£4300 rdemption on current mortgage
£250 mortgage get out fee on current
£799 FD setup fee


just to break even need BoE to remainb 1% for next 30 months
if BoE rises to 3% then its pointless

switching would have been worthwhile on the woolwich BoE + 0.19 even when paying redemtion
6 months to see what happens, apply early is best



BUT
the other concern is house prices ...


so as soon as theres an examply rate at close to 3% say 3.39% fixed for 7 years will go for it

for now sitting stum

kacee

Anon wrote: »

Thank you - did you take out the extra £75000 as an offset loan, or include it in the mortgage? I am assuming that if it is possible it is better to go for an increased mortgage, as that is then available for the mortgage term, whereas the loan is effectively an overdraft and could be withdrawn/recalled at any time.

Anon

It was an increase in Mortgage, our LTV was only 10% and we upped it to 40%

It has sat in the offset saving account for 3 months now, but will be getting used shortly.

dimbo61

Hi anon
I read through the thread and all your posts
I have a fixed offset for 5 years at a slightly lower rate than you with just less than 2 years to go then BOE + 0.75%
The banking sector is in complete confusion hence BOE1%, savings rates of 2/3% from ISA,s and some lucky people on very low mortgage rates AT THE MOMENT.
The 5 year fix you are now on is not bad compared to current deals of about 4.5/4.99% and to look at the FD tracker at 2.89% is not a fair comparison.
Rates must and will go up in the next 2/3/4 years and you may end up paying more than your current rate.
If you have savings earning poor returns then shop round.
Two lenders including FD are now offering 7% on ISA,s ( only £3600 this year each )
Taking the term down to say 5 years and overpaying by £500 a month carries no risk and does not cost you ERC
I like offset mortgages but think long term and paying off the debt is the best way to pay less interest ! GOOD LUCK

Anon

dimbo61 wrote: »

Hi anon
I read through the thread and all your posts
I have a fixed offset for 5 years at a slightly lower rate than you with just less than 2 years to go then BOE + 0.75%
The banking sector is in complete confusion hence BOE1%, savings rates of 2/3% from ISA,s and some lucky people on very low mortgage rates AT THE MOMENT.
The 5 year fix you are now on is not bad compared to current deals of about 4.5/4.99% and to look at the FD tracker at 2.89% is not a fair comparison.
Rates must and will go up in the next 2/3/4 years and you may end up paying more than your current rate.
If you have savings earning poor returns then shop round.
Two lenders including FD are now offering 7% on ISA,s ( only £3600 this year each )
Taking the term down to say 5 years and overpaying by £500 a month carries no risk and does not cost you ERC
I like offset mortgages but think long term and paying off the debt is the best way to pay less interest ! GOOD LUCK

Thank you for your thoughts on this.

It is tricky - taking the term down to 5 years does result in paying it off sooner and is perhaps lower risk, but also carries higher interest - by coming out and being able to pay off a chunk then increased payments, 4 years could be achievable. As I mentioned above, the interest that I am being charged on money in the mortgage that is currently sitting in savings would mostly offset the ERC, therefore anything above that is a bonus. I appreciate that the rates are unusually low at the moment and therefore may be getting a false impression.

What I am also comparing is how much the interest rate would have to be to achieve 5.63% after tax (7% for my wife, 9.4% for me according to Martin's calculator), rather than the 2.89%, as the 5.63% is what I am currently paying out on money that is currently part of the mortgage balance but would be reduced by offsetting it. I appreciate that the savings are earning interest and I am conveniently not entering that into the equation, but the higher interest accounts are generally paying in £250 max per month therefore limits how much can be earned (and already used ISA allowances for this year).

Anon