Virgin One Account advice needed

patsec

We took on an 84000 mortgage at the end of 2000 and (with some help from stoozing and a 14000 endowment reaching maturity), will have it cleared by the end of this year. Having spent the previous 20 years in an endowment mortgage with not a penny reduced at the end of it, I can't praise this type of mortgage highly enough, but as ViksB says, you need to be disciplined enough to save rather than spend your surplus. Having said that, we also replaced our two old bangers with new cars (also paid off) and have been on some nice holidays.

archie2410

Here's our situation, we have a repayment mortgage with 67000 left for the next 16 years. We have about 55000 tucked away in various savings, to be used for son education in 10 years time. Our house is worth about 340000.
I'm interested in changing to the one account, the shrinker tells me we will save 16000 in interest and have the whole thing paid off in 9 years, just in time for school fees to kick in. My idea is that I wouldn't put the 55000 into the one account, as I move it all the time to catch the best interest rates. But if I can get the mortgage paid off before school fees, then I won't need to use the savings to pay the fees. I feel I might be missing out on a good deal, and perhaps am not using our finances to the best of there ability. Another thing is that to get out of my current mortgage there would be penalties amounting to 2500. Can anyone give me some advice. Would be most apprieciated.

jamesd

The One Account shrinker probably assumed that the total of the savings you told it about (now and monthly in the future) would be used to offset the mortgage. If that is not your intent, you should try again with the amount you give as savings reduced to only the part you will deposit in the One Account.

The interest rates for the One Account are quite high. If you don't need all the features of a current account mortgage, there are many competing offset mortgages which reduce the balance owed by savings, just as the One Account does.

Flexible non-offset mortgages with unlimited overpayment and return of funds facilities are also potential competitors that might be suitable but cheaper.

It's very unlikely that your savings could be earning more in interest than the high tax-adjusted interest rate you would pay for a One Account mortgage. That high interest rate is likely to strongly favor putting the savings into the mortgage account. Of course, this is only true because the interest rate for this mortgage is so high.

If your current mortgage does allow unlimited overpayments, doing that is likely to get you a better return than the interest you could earn on most savings (but not necessarily better than the rate on investments).

Hard to say more without knowing your current mortgage interest rate and ideally the lender and whether it allows overpayments and withdrawing of overpayments.

archie2410

Thanks for the reply Jamesd. When I did the mortgage shrinker, I didn't include our savings, but I did put that we would have 2500 in savings. At the moment the savings are in various places but the best place with the most money invested is earning 6.15% special rate until next April. The rest only manages about 5%. My current mortgage with A&L allows no overpayments and we have a fixed rate of 4.89%, which ends in Dec 07.

jamesd

The rest of this reply ONLY applies if you're a basic rate tax payer! If you aren't, say so because it substantially changes the picture.

At 6.15% the after tax interest on most of your savings is 4.92%, so you're very slightly better off not overpaying your mortgage as long as you're getting that rate.

The part managing 5% might usefully be moved into regular saver accounts with interest rates of 10% gross from Alliance and Leicester for one year if you don't already have an account with them and 8% gross from Lloyds TSB. Coventry Building Society does a 5.1% current account so the rest could go there and could be there until you can deposit into a regular saver.

For the nine months between April and December the after tax difference in interest between the 5.1% Coventry account and the mortgage rate is £66 per £10,000 in savings. That's how much you lose by not being able to put it into paying off the mortgage.

Since at least most of your savings are earning more in interest than you're paying in interest, it doesn't look as though you need to do anything urgent about paying the mortgage and it also doesn't look as though there would be benefit from the One Account, since it would raise your mortgage interest rate.

If your repayment penalty ends in Dec 07, I suggest reviewing the situation again three months before then so you can seek out the best available mortgage deal for you and have it ready to go by December if switching looks sensible.

It's worth a quick double-check that you can't overpay 5% or 10% of the outstanding balance. If you could you'd still need to see when the interest was calculated to work out when the best time to pay off some of the mortgage was.

All of this does assume that you don't place a sufficiently high value on the great flexibility of the One Account for things like stopping payments whenever you like and resuming whenever you like. For some people that's a very useful capability and might make the higher cost worth it.

One of the mortgage experts here might have some alternative suggestions for your mortgage but given your interest rate and the penalty it looks as though it would be hard to find a better deal.

MarkyMarkD

Archie

For someone in your situation, who has a large lump of savings which they want back at a fixed point in the future, I explicitly would NOT recommend an offset account.

Unless you are continually paying money off the offset, it simply isn't good value.

Given that you are tied in to your current mortgage product until December 2007, there's no sense in doing anything right now anyway. But for others in a similar situation, all they need to do is:

- borrow £67k on their mortgage on the best rate available with FLEXIBLE FEATURES
- pay the £55k from the savings account off the mortgage immediately following completion leaving £12k outstanding
- make the payments they would have made on the £67k
- and then draw down the £55k when they need it in x years' time.

The flexible features required in the mortgage are the ability to overpay without limit, and the ability to draw down the overpayments on demand.

As you mention you are with A&L at present, all of A&L's discounted mortgages are flexible to the extent you require and the rates are normally relatively competitive. So, in December 2007, you could change from your fixed rate to a discounted (flexible) rate and THEN put the strategy I detailed above into action.

(As the net balance will be so low, it would be better VFM to opt for a "fee free" deal with a marginally higher rate, rather than a rate with the rock-bottom rate but a higher fee.)

Hope that helps.