In a quandary - fixed rate and pay off or offset?

supersunshine

Hi everyone

I was wondering if I could pick your brians? I have a mortgage (as noted below) and was wondering what is best to do? Should I get a fixed rate mortgage for 5 years or less and pay a bit off my mortgage total or get an offset mortgage and let the savings tot up?

Mortgage = £93000
time left = roughly 8 years
house value = around £270,000
Savings = around £5000 would be happy to use to pay off some of mortgage but roughly £9000 in total (want to keep some for rainy day).

I was on a really good discount tracker which I was overpaying on but that is due to finish soon so I will go on SVR of 3.5%. I want to reduce the term of my mortgage as much as possible really.

Any ideas greatly appreciated.

Cheers

figgles

Can you not overpay your existing mortgage? Paying an extra lump each month should help reduce the remaining time + interest paid.

Alternatively look at the Virgin One Account or the First Direct Offset. I've a Virgin account myself, have had for 10 years and I think it's excellent.

supersunshine

Hiya yep I have been paying a little more off each month whilst our rates are lowers and have knocked quite a bit off the term. I can pay 10% I think per year. What I was wondering is if it was best to go for the offset ones or if it would reduce to term more by actually paying off lumps?

figgles

There wouldnt be much difference, however the advantage of the offset is that if you need the money it's there to be used again. For example I've paid £000's off using my Virgin account, and then when we need a new car or something we can just get the money back and buy it cash (unless we can get a better deal with 0% interest, etc) without any hassle, some banks make you fill in a load of paperwork to get your money back.

With the Virgin account you basically have an overdraft which is a facility, so you could have a 50% facility giving you £135K (currently at 3.65%) as an overdraft. You can put your savings and things into it too so (again going off your numbers) you'd be £88K into your overdraft facility.

Every month as money goes in, the £88K dwindles down, and as interest is charged daily you'll notice a difference there too.

Like most things, there are people who hate the account, however if you are disciplined with money I believe its fantastic.

supersunshine

It certainly does sound interesting and I am good with my money so it looks like it will be worth looking into. Does the interest rate compare well with the fixed rate mortgages on offer? Is it a capital and interest mortgage as I did hear that some are interest only which would worry me.

WestonDave

The first direct variant has different pots so you'd effectively be earning your mortgage rate on your savings. Depends whether you want to have one account or seperate pots. The theory used to be that rates on offset mortgages weren't competitive in their own right so you needed to have savings to make them pay. Now the rates are often as good or better. First Direct will do a 3 year fix at 4.89% with a £99 fee (plus valuation as you aren't currently with them - there is a lower rate with a higher fee but it wouldn't be worth it in your case due to the amount left on your mortgage).

Technically most offset accounts are interest only but FD will set theirs up so that the transfer is a standing order that you can alter - they will also tell you what the repayment (capital and interest) figure should be so you can set it at that. The only thing is that when rates move they won't automatically shift the payments but they will recalculate for you if you ask. Their website has some calculators on that you can play with to show how the offset works - don't forget that as well as savings offsetting any money you have in your current account after pay day also saves interest. I've had one of these for about 5 years now and have found their service very good.

figgles

Current rate for 50% or less LTV is 3.65%. Basically treat it as you would an overdraft, so if you owed £50000 and paid in £2000 one month, with outgoings of £1000 + £200 interest, you've paid off £800 capital too. Next month you're looking at £49,200, bit less interest so a bit more capital.

As it's all in one account (hence the name), you see by your statements each month (and/or online) how much has gone in, how much has come out, and how much difference there is (i.e. how much capital you've paid off or dipped into).

The First Direct one works in a similar fashion I believe, however the mortgage account and your current (and savings accounts) are all separate. I just prefer the all in one approach.

There are some calculators on the site at:
http://www.oneaccount.com/onev3/calculator/calculator-landing.shtml

And also you and anyone you know with the account can get £125 for applying:
http://www.virginone.co.uk/onev3/virgin/recommend/service-recommend.html

figgles

WestonDave wrote: »

The first direct variant has different pots so you'd effectively be earning your mortgage rate on your savings. Depends whether you want to have one account or seperate pots. The theory used to be that rates on offset mortgages weren't competitive in their own right so you needed to have savings to make them pay. Now the rates are often as good or better. First Direct will do a 3 year fix at 4.89% with a £99 fee (plus valuation as you aren't currently with them - there is a lower rate with a higher fee but it wouldn't be worth it in your case due to the amount left on your mortgage).

Technically most offset accounts are interest only but FD will set theirs up so that the transfer is a standing order that you can alter - they will also tell you what the repayment (capital and interest) figure should be so you can set it at that. The only thing is that when rates move they won't automatically shift the payments but they will recalculate for you if you ask. Their website has some calculators on that you can play with to show how the offset works - don't forget that as well as savings offsetting any money you have in your current account after pay day also saves interest. I've had one of these for about 5 years now and have found their service very good.

You can treat all offset mortgages like this, rather than having £5000 in a savings account earning 1%, it's effectively SAVING you the mortgage rate (4% say) on that £5000. There are some complex calculations about to work out if it's worth it or not, but if you are a higher rate tax payer for example then you'll need to be earning the mortgage rate + 40% (roughly, I'm not sure of the figure exactly) for it to be worth NOT using an offset type account.

supersunshine

Thanks these posts are really interesting :-)

figgles

All I can do is sing the praises of the Virgin account I've had for 10 years, used it very wisely and ended up in a much better position financially for it and in a nice new big house I moved into 3 weeks ago, with a normal mortgage I know I wouldnt have been where I am today.