Dumb question probably... FD Offset, why would you ever overpay?

Temrael

Hi there,

We are in a fixed rate period with Nationwide (4.45%) until October but are trying to plan ahead a bit for what we ought to do when it ends (very aware though that rates and offers will most likely be quite different then).

We have a fair chunk of savings as we like to have a big pot for emergencies and we are also saving to do lots of work on the house.

In October our circumstances are likely to be something like..

£250k house value
£80k mortgage outstanding (so nice, low LTV)
£6k or so savings (but rising at maybe £1k a month as the building work will be largely complete)
£14k or so in various ISAs

...we will probably look to take out an offset mortgage over 7 or 8 years with FD or someone (either fixed or tracker depending on how rates look at the time).

Anyway a couple of questions...

a) ERPs aside, is it silly to ever make an overpayment on an offset mortgage where it isn't actually closing the mortgage account? i.e. You don't gain anything? Say I take £5k of savings and use it to overpay it won't help clear the mortgage any quicker than if I'd left it where it was in the offsetting savings account? And in fact it's less flexible to overpay as if I then need to have that money back for some reason I have to pay the bank to lend it to me? If I'd just kept it in savings it would still be saving me money on the mortgage interest and it's mine to spend for free if I need it?

b) As I understand it, we ought to leave the ISAs where they are and not just dump them into the FD savings accounts? As the accrued ISA allowances will be more valuable than the offset achieved?

[Deleted User]

Why do you want to move to an offset on over 4% when you could automatically move to Nationwide's BMR currently set at 2.5% (assuming that you took out your fix before April 2009). You could then overpay on your Nationwide mortgage if you wished with the option to withdraw overpayments later if required. In the meantime overpayments reduce the interest that you pay on your mortgage. That is the real benefit of overpaying.

Dom3663

Just a quick calculation I'd be tempted to use 5k to pay off some more of your mortgage, if you can; to get your LTV down to 30%. 30% of 250 being 75k

Temrael

CR10 wrote: »

Why do you want to move to an offset on over 4% when you could automatically move to Nationwide's BMR currently set at 2.5%. You could then overpay on your Nationwide mortgage if you wished with the option to withdraw overpayments later if required. In the meantime overpayments reduce the interest that you pay on your mortgage. That is the real benefit of overpaying.

Thanks for that, the FD Offset base rate tracker is currently 2.39% for LTVs of 65% and lower? And if I withdraw overpayments I have made at Nationwide I pay interest on it as though it were a loan, I thought?

Temrael

Dom3663 wrote: »

Just a quick calculation I'd be tempted to use 5k to pay off some more of your mortgage, if you can; to get your LTV down to 30%. 30% of 250 being 75k

Thanks for that, that's certainly an option, are there products that give good rates for such low LTVs then?

[Deleted User]

Temrael wrote: »

And if I withdraw overpayments I have made at Nationwide I pay interest on it as though it were a loan, I thought?

You would pay your normal mortgage rate on any overpayments that were withdrawn.

Temrael

Yeah. Which is effectively paying them to loan me my money back? That's what attractive about offsetting I think (if I'm understanding it right). I get the benefit of overpaying (reduction in interest) without losing free access to my money. And obviously once your savings have reached the appropriate level you get to clear the whole whole mortgage with them.

Gorgeous_George

I'd borrow more than I need i.e., up to the 65% LTV. Stick the surplus in the offset account and you have a ready supply of cheap money should you ever need it.

You should be able to invest it elsewhere for returns better than 3.29% although these may tie the money up so could be a bit risky.

GG

TighterThanTwoCoatsOfPain

Given that FD have unlimited overpayments i'd be do (well i did a couple of years ago!) what GG suggests above..

I'd also be tempted to take a longer terms then overpaying to keep the term at 7/8 years depending on what you want..

If you pay of "early" then great, if your circumstances change for the worst you have the comfort of knowing you can adjust the compulsory payments back if needs be..

One for the financially disciplined!

eo you could always borrow more than you need over a longer terms with the balance just sitting oversetting..

You control the payments yourself via standing order online so

dimbo61

The only danger is if you borrow more than you need and have a large amount of money sitting in the offset account and then lose your job the nice benefits people expect you to live off your savings !!!
Hence dont keep more than £16K in savings while you still have a mortgage.
£16K is still a very good emergency fund and a pot you can dip into when needed to pay for the new car/holiday/new kitchen ETC

Temrael

Thanks guys, I don't think I need to borrow more than I need as my savings will grow pretty fast. My question was more...

In an offset mortgage, does one gain anything at all by using 5 or 10k or savings to make an overpayment to reduce the capital? Or are you just as well leaving that money in savings, where it can offset and you have access to it?