Off set mortgages - help

LD72

Hi, we are seriously looking at an offset mortgage as it seems an ideal way to pay off your mortgage earlier.

We are looking at First Direct, they have sent the details through, yet they only appear to quote the repayments as interest only, yet over the phone they said we could do this as capital. Obviously we want to pay off the mortgage off as soon as we can. Can anyone just clarify if this is ok, as we don't want to be left with a massive sum at the end still to pay.

I guess it will be down to us to ensure that we pay enough in to cover the capital, but at other lenders i.e Leeds they show the figures as capital so we know what we need to pay, and when it is to be paid off, FD appear to leave a lot to the customer. You have to increase your payments when the bank of interest goes up, etc etc. Is this normal.

thanks

pvr

LD72 wrote: »

We are looking at First Direct, they have sent the details through, yet they only appear to quote the repayments as interest only, yet over the phone they said we could do this as capital. Obviously we want to pay off the mortgage off as soon as we can. Can anyone just clarify if this is ok, as we don't want to be left with a massive sum at the end still to pay.

I recently took out a first direct offset mortgage. Yes they quote interest only but you can (and they encourage you to) make capital and interest payments every month.

LD72 wrote: »

You have to increase your payments when the bank of interest goes up, etc etc. Is this normal.

This is what I have been told by first direct and it seemed strange to me as well.

getmore4less

Why are you looking at an offset mortgage asking these sort of questions hints you may not fully understand the product.

Any mortgage calculator will get you close to the rate you need to actualy pay(save) into the mortgage/offset pot each month.

This will be the minimum to meet the normal term you selected, save/pay more it gets paid off quicker, simple. if you are not comfortable doing this then is an offset the correct product?

pardal51

As correctly said by pvr you can pay the capital every month. Use the calculator from this thread so you can work out the capital amount: https://forums.moneysavingexpert.com/discussion/1157173 Don't forget to keep as much money as possible in your current/savings to offset the interes every month.

Using the calculator gives you the figures so you can pay off capital+interest every month. It is your responsibility to increase the monthly payment accordingly to cover capital if interest rates go up.

jamesd

The day that the money goes into your offset current or savings account it starts reducing your mortgage interest. That reduction is exactly the same as it would be if you made it as a capital repayment on the mortgage. It saves you no interest to lock it away as a capital payment instead of keeping it in a linked savings account.

Instead of thinking in terms of repayments, try to think in terms of getting the offset savings account balance to equal the mortgage amount as fast as possible. Once you do that you can pay off the mortgage whenever you like and won't be paying any mortgage interest at all.

Now consider that offset savings account pot. If you have financial difficulties you can draw on it to make the minimum mortgage payments if you like. That's additional safety margin for you that you don't get by making capital payments. Ever use a car loan? Once you've a nice pot of money in the offset account you can get the loan at mortgage interest rates instead of personal loan rates by withdrawing it from the offset account and making the repayments into it.

So considering only the mortgage its easy: it only hurts your flexibility to make capital repayments and it saves you no interest at all. If you ever take other loans, it'll save you interest to have the money available at mortgage interest rates.

That's the mortgage but there's more to life than a mortgage. If you're investing it's generally easy to make more money over the long term from investments than you pay in mortgage interest. Repayments when the alternative is investing can be expected to make you poorer, not better off. That means you either accumulate the money to repay the mortgage in less time when investing or get to retire earlier than you otherwise could. This isn't for everyone, some people prefer to take longer to repay their mortgage and not accept the ups and downs of investing.

LD72

Hi Jamesd. Many thanks for your response, which included some good advice especially the bit about using the money in the offset account to pay for car etc to take advantage of the lower interest rates. We think this offset system makes sense as you pay off your mortage a few years early and keep a big savings lump sum, or pay off really early using the money in savings account (but lose all that money you saved). However, i'm a little unsure about the mechanics of the offset mortgage, particularly the bit where you said "It saves you no interest to lock it away as a capital payment instead of keeping it in a linked savings account".

The product we have been offered is interest only. As such, we have to make a relatively small monthly payment to cover this. They said on the phone we can make interest and capital payments by increasing the payment by £400/month. However, i think you are indicating that it's more beneficial to make the interest payment only and put the remaining £400 into the linked savings account. But as the account is linked to the mortgage, does it matter where this £400/month goes (i.e. into the mortgage or saving account) as long we maintain to make higher payment? Would we not reach the finish line at the same time regardless?

pardal51

LD72 wrote: »

Hi Jamesd. Many thanks for your response, which included some good advice especially the bit about using the money in the offset account to pay for car etc to take advantage of the lower interest rates. We think this offset system makes sense as you pay off your mortage a few years early and keep a big savings lump sum, or pay off really early using the money in savings account (but lose all that money you saved). However, i'm a little unsure about the mechanics of the offset mortgage, particularly the bit where you said "It saves you no interest to lock it away as a capital payment instead of keeping it in a linked savings account".

The product we have been offered is interest only. As such, we have to make a relatively small monthly payment to cover this. They said on the phone we can make interest and capital payments by increasing the payment by £400/month. However, i think you are indicating that it's more beneficial to make the interest payment only and put the remaining £400 into the linked savings account. But as the account is linked to the mortgage, does it matter where this £400/month goes (i.e. into the mortgage or saving account) as long we maintain to make higher payment? Would we not reach the finish line at the same time regardless?

You need to be disciplined because if you don't repay the capital you must keep its portion in the offset savings pot. This is because if you keep withdrawing the cash to finance car, holidays, etc you end up not having enough cash to repay the capital at the end of the term.

Hope this makes sense.

kb070857

Further to the other above mentioned comments regarding the benefits of having an Offset Mortgage.
I would also suggest that whilst you may be able to obtain a mortgage today, this may not always be the case given the ever increasing tightening of lenders lending criteria and the fact that your circumstances may change so you may not be able to borrow again in the future.
Therefore, if you feel that you are a disciplined type a person who is able to keep control of his own finances well, and confident that you will not spend the monies put into the mortgage linked Offset accounts unless absolutely necessary or prudent to do so because of the low interest rate charge the account affords. Then perhaps the ongoing flexibility of an Interest Only Offset mortgage would be the best option for you until the amount within the Offset mortgage account equals the amount borrowed and you fully repay the actual mortgage loan.
You should however only consider doing this at the end of the term or when you are sure that do not require this type of fluidity and access to a drawdown cash to buy a new car etc. without the pain of having to make a new application every time you may require funds in the future, this is of course assuming you still qualify and willing to pay the additional cost involved.

I hope this helps and I strongly advise that you take the time to speak to a qualified person to discuss your options in more detail

I am an Independent Mortgage Adviser
You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it.
This signature is here as I follow MSE's Mortgage Adviser code of conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.

jamesd

LD72 wrote: »

However, i'm a little unsure about the mechanics of the offset mortgage, particularly the bit where you said "It saves you no interest to lock it away as a capital payment instead of keeping it in a linked savings account"

With an offset mortgage like this what they do is take the mortgage balance each day and subtract from it the current account and linked savings account(s) balances. Then they calculate mortgage interest on the difference. Some offset mortgages won't deduct current account balance but this one does.

LD72 wrote: »

The product we have been offered is interest only. As such, we have to make a relatively small monthly payment to cover this. They said on the phone we can make interest and capital payments by increasing the payment by £400/month. However, i think you are indicating that it's more beneficial to make the interest payment only and put the remaining £400 into the linked savings account. But as the account is linked to the mortgage, does it matter where this £400/month goes (i.e. into the mortgage or saving account) as long we maintain to make higher payment? Would we not reach the finish line at the same time regardless?

Yes, it's better to put the £400 into a linked savings account. You could have two, one for the £400 that'll keep you on track for repayment mortgage term and another for overpayments that gets any money left over in your current account each month. Then you could choose to restrict yourself to drawing only on the overpayment one so that you stay on track.

Not that you need to take the money out of the current account, the money there also reduces the mortgage interest. It's just nice to put the money away in a savings account so you can keep it apart from your day to day spending and bills.

It doesn't make any difference where you put the money when it comes to how long it takes to pay it off.

The £400 a month doesn't vary with the interest rate, it's just mortgage amount divided by the number of months in the mortgage term. The interest only interest you pay each month will vary with the interest rate and your account balances.

InMyDreams

jamesd wrote: »

The £400 a month doesn't vary with the interest rate, it's just mortgage amount divided by the number of months in the mortgage term.

Is this right?
The £400 must take account of what the interest rate or return on the £400 will be, surely (if paying into a separate account). If paying into a linked account, don't forget to add on the interest you are saving too. If it's linked, your interest payment will go down but you have to add this saving to your £400 capital repayment to stay on track.

If you compare the repayments on a £100K repayment mortgage (say) at 5% and 10%, the 10% is obviously a higher overall payment each month, but I'm pretty sure the amount that is capital repayment is a bit different too. Not just the proportion, but the actual amount too.

jamesd

Yes, fixed 400 is right when using one way of looking at it, but it's not the conventional mortgage way. It doesn't need to take any account of the interest rate because there is a different charge made each month for the interest and that goes up and down depending on how much money is in the offset accounts.

If the interest part is high, a fixed monthly payment would have less capital repayment and the mortgage term would become longer at that particular capital:interest split. If the interest part is lower the capital repayment part would rise and the term would shorten. These effects could produce really large month by month swings in predicted term that are unrealistic.

With a conventional mortgage and unchanging interest rate the monthly payment is fixed and as the interest portion of each monthly payment decreases the capital repayment portion increases. That makes the monthly payment relatively easy to calculate.

For someone who's keen to clear their mortgage quickly this doesn't really matter. If they don't spend the money it just automatically works like a mortgage overpayment.

I haven't looked at the FD mortgage statements and those might include some calculations that do give a repayment mortgage equivalent monthly payment to keep on track. Someone who's seen those might be able to write more about just what information they provide to help with this.

You're right that for a standard repayment mortgage the lower interest rate monthly payment will start out with a higher capital repayment part than the higher interest rate one. About twice as much at 5% as at 10%. This happens because each bit of capital repayment saves more future interest on the higher rate loan than on the lower rate one. So you can start out with a lower capital part and still reach the target.