First Direct offset - should I max out on mortgage and keep my cash offsetting?

wamadam

I’m after some advice…

I’ve bought a house for £330,000. I have a deposit of £240,000.

I’ve already decided to get a First Direct offset mortgage. I plan to make a mortgage payment of £1,000 each month regardless.

I’m considering two options.

• Pay a deposit of £240,000 and get a mortgage of £90,000.

• Go for the maximum mortgage available to me which is £190,000. Pay a deposit of £140,000 (to make it up to £330,000). Offset the mortgage with the remaining £100,000.

I like option two because it will be the equivalent of having a mortgage of £90,000. But I can keep hold of £100,000 cash in case of emergencies.


If I sell the house in the next few years, the big loan will be paid back to the bank anyway. If I keep the house for a few years, I will end up using the £100,000 to pay the bank back anyway.


What are the pitfalls of option two?

Thrugelmir

Why do you feel the need to keep £100,000 for emergencies?

wamadam

I'd just rather have access to some cash rather than it all being tied up in the house.

What does everybody think are the pitfalls to option two?

Thrugelmir

There are no pitfalls. Thats why I asked the question.

Bar the fact that credit agency reports will show your gross mortgage balance outstanding. If you seek additional finance for anything.

Of course you will pay a higher rate of mortgage interest on the higher LTV.

michaels

I have done as you propose (keeping ltv where it qualifies for the lowest rate) and have the spare readies saved in wifre's name as she is a non-taxpayer earning more than the FD mortgage rate for a nice annual proffit.

However there may be issues if you are made redundant and want to claim benefits - it is unclear if you paid down the mortgage on redundancy whether it would count as deliberate deprivation of capital and thus disqualify you from means tested benefits.

wamadam

Thanks, Thrugelmir. As I understand it, either option would qualify me for FD's most favourable rate which is 65% LTV.

Michaels, that's reassuring and useful to know.

Without wishing to sound thick, I'm not sure what you mean by "as she is a non-taxpayer earning more than the FD mortgage rate for a nice annual profit".

Can you clarify? Sorry to be a pain.

jamesd

I'm buying a flat with a First Direct mortgage that I could buy for cash. I'd invest the money, but if I wasn't investing it, I'd keep it in the offset account for the flexibility.

However, do consider whether you can make more from savings accounts or NS&I products than you can save in interest in the offset account. It's very likely that you can make more money than the interest will cost you by using things like the NS&I index-linked certificates that pay RPI inflation plus 1%.

If your spouse isn't a tax payer they can get some rates for savings accounts that may be above your mortgage interest rate, so letting them do that would be more profitable than using the offset account.

Thrugelmir

wamadam wrote: »

Thanks, Thrugelmir. As I understand it, either option would qualify me for FD's most favourable rate which is 65% LTV.

My comment was based on the fact that 3.69% could be bettered though. If you took FD's tracker for exampe it would only cost 2.29%. In effect you are paying for having the offset facility.

On a simple basis thats around £1,000 of interest saved in year one on a £90k , which could be saved elsewhere.

dimbo61

Like others have said bear in mind the £50K limit if a bank/building society got into trouble ( doubt it but you never know) and keeping more than £16K means no means tested benefits ( again somthing that might not apply to YOU).
If you pay a bigger deposit you have a smaller mortgage payment each month.
I kept 6/9 months of income in the offset for emergencies!!!

michaels

pretty much as jamesd describes in - my fd offset mortgage costs 2.59, the funds are in my wife's name in various accounts all instant access paying between 3.15 and 5% She is a non tax payer so the spread is all profit.

wamadam wrote: »

Thanks, Thrugelmir. As I understand it, either option would qualify me for FD's most favourable rate which is 65% LTV.

Michaels, that's reassuring and useful to know.

Without wishing to sound thick, I'm not sure what you mean by "as she is a non-taxpayer earning more than the FD mortgage rate for a nice annual profit".

Can you clarify? Sorry to be a pain.

jamesd

dimbo61 wrote: »

Like others have said bear in mind the £50K limit if a bank/building society got into trouble

The rules are different for banks and building societies.

For a bank like First Direct, the total in all deposits will be calculated and then the total of all borrowing subtracted. If the result is positive, you're owed money and will get up to the FSCS limit. If the result is negative, that's how much you will still owe. This treatment is because banks have a right of offset automatically under common law. Not mortgage offset, but right of a bank to offset balances in one account against balances in another.

For building societies the situation would depend on whether there is a contractual right of offset between accounts. Most building societies set up a right of offset in their mortgage contracts but you should check.

In the cases where there is a right of offset you'd effectively be forced to overpay your mortgage with your savings with the same institution even if you didn't want to. But you could liberate the money again by remortgaging.