Off set mortgages - help

InMyDreams

jamesd wrote: »

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.

Thanks for replying, but I still don't get this bit. (I understand all the bit I've snipped.)

I don't understand what way you can look at a mortgage and just split the amount by the number of months in the term and come up with a useful figure. The OP has said that the extra needed to bring the interest only figure up to a repayments one is £400. This difference should be far less than the mortgage amount/term in months.

I also don't understand how you can not take account of the interest rate (because that £400 a month will itself be earning (or reducing the) interest). Yes, there is a separate charge depending on what is in the accounts. If you have a lot in the linked accounts, the interest charge will be much lower. This 'saving' is the equivalent to the interest you would have earned if your saving pot was not linked but in an account earning interest at the same rate. So in the same way you shouldn't spend the interest earned if it was in a separate savings account, you shouldn't spend the 'saving' you have made by having the account linked. This 'saving' needs to be ploughed back into the mortgage balance too with the other capital repayments. The only way I can make your 'mortgage amount divided by the number of months in the mortgage term' comment make sense to me is if the OP fully offset their mortgage with savings right from the start and was therefore neither paying nor earning any interest at all. This is also the only way I can understand how it is possible to not take account of interest rates.

Also, with the First Direct offset mortgages, there is no 'locking away' of capital as far as I understand. You are free to move money between all accounts up to the limits set. It is just as easy to move money into and out of the mortgage balance as it is into and out of any of the linked savings accounts. You do it in exactly the same way except the limit on the savings accounts is £0 and the limit on the mortgage account is minus whatever was agreed at the outset. I say 'as far as I understand' because I've never tried to move money in or out of my mortgage balance, but the screen looks the same and tells me I have £1 'available' but I've never actually proceeded. (The actual balance is £1 different from the original agreed figure... maybe if I put money into it that agreed figure would change... someone who has made capital payments into their FD offset mortgage could maybe confirm?)

I am also a bit concerned by the OPs statement about an offset mortgage being "an ideal way to pay off your mortgage earlier" with little apparent understanding of why or how this works.

This has really set my alarm bells ringing:

LD72 wrote: »

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,

What makes the OP think that the mortgage will be paid off *a few years early*? Or that they will be able to pay it off early *and* walk away with a lump sum? This will only happen if they over-pay (either into mortgage or other saving vehicle) which they don't need an offset mortgage for.

jamesd

The key part of the £400 a month is that there is also an additional interest payment. Each time you make the payment of £400 and interest, the interest for the next month will be reduced by the interest saved on the £400 that's no longer having interest paid on it. If the interest rate doubles, the £400 part stays the same and the interest part doubles.

£400 isn't right at all if you think of the mortgage as just like a standard repayment mortgage with fixed monthly payment amounts and a split between interest and capital that changes every month.

I don't have my mortgage account set up et so you've seen more than I have about that and the mortgage statements that FD provides.

If someone uses the offset mortgage and its linked savings and current account for all of their money and is regularly spending less than their income they would end up accumulating enough money in the accounts to pay off the mortgage much earlier. Expecting it to be years earlier is fair enough if someone knows that they will be spending a lot less than their income because they are really determined to clear the mortgage quickly.

Loughton_Monkey

I am a 100% satisfied user of a FD Offset Mortgage. When I got a temporay job overseas, I found the mortgage the best place to "invest" my surplus earnings/bonus. Upon return to UK, the balance was fully offset, but my intention was to keep it like that for two reasons. Firstly, they keep the house deeds safely for free, but mainly I had visions on buying a small holiday home, and this would have allowed me to be (effectively) a cash buyer.

In the event, I didn't go through with any second property, but guess what? FD are charging me 1% above base. That's 1½%. So I scraped the whole lot out, and put it in a variety of bonds (Barnsley BS at 3.85%, Post Office 3.85%). This is nice for me (less so for FD) and helps to 'offset' the derisory interest I get on all my other cash savings!

So I'd never advise anyone physically to pay off an offset mortgage early, even when it's fully 'paid'. You never know when circumstances might turn and you might get a similar opportunity.

jamesd

Right. Flexibility is a very good thing.

InMyDreams

Thanks jamesd. Will have to go and think some more. Still don't get the relevance of mortgage amount/number of months and I'm sure this isn't where the OP's £400 has come from, but happy to pootle off and number crunch when I get a second.

Regards to the paying off early, that's what I meant. It will get paid off early if you regularly spend less than your income, but you can achieve similar by putting this excess either into some other ear-marked savings pot (or investment) (and not spending it) or by overpaying a regular mortgage. The advantage of offset is the flexibility to do this (put money in and out) with amounts that aren't regular 'excess income' as Loughton Monkey has done. And if you are going to truly utilise this flexibilty, I fear that you need to be a lot more keyed up about it and how it works than I feel the OP is or there may well be the nasty surprise waiting that he fears. He talks about paying his mortgage off early but his posts don't seem to imply that he has excess income, indeed he is more concerned that the minimum payment suggested by FD will be enough. If he takes the money back out to buy that car, it clearly could be cheaper than taking out a car loan, but does he understand why or how or will he end up paying that car off over 30 years (or even not at all?) The OP claims not to understand the mechanics of an offset mortgage but happily asserts that it's "an ideal way to pay off your mortgage earlier". He talks about 'maintaining' rather than exceeding the extra amount suggested by FD. To me that does not sound like someone with lots of excess income. I'm not sure he understands that putting aside this minimum will not be enough to pay off the mortgage years early and have a lump sum at the end unless he already has or is planning to acquire additional savings to offset. Suggesting that he can use his mortgage pot to buy a car is a bit scary.

Loughton Monkey, I am also a 100% satisfied customer of a FD offset mortgage. I love the flexibility. But what I'm saying is that with this particular offset mortgage, you do not loose any flexibility by paying money into the mortgage account compared to any linked savings account as it's just as easy to get it back out of either. Whichever you do makes no difference as far as I can see (although I haven't because my personal preference is to keep things separate). You can't really get more flexible than that.

Loughton_Monkey

InMyDreams wrote: »

Loughton Monkey, I am also a 100% satisfied customer of a FD offset mortgage. I love the flexibility. But what I'm saying is that with this particular offset mortgage, you do not loose any flexibility by paying money into the mortgage account compared to any linked savings account as it's just as easy to get it back out of either. Whichever you do makes no difference as far as I can see (although I haven't because my personal preference is to keep things separate). You can't really get more flexible than that.

True. The mortgage and linked bank accounts work smoothly together. At the time I had them fully "offset", though, I was rather worried about how FSCS would treat things if the bank went bust. £1K in current account and -£1K owing on mortgage is one thing. If you had £200K in current and -£200K mortgage, would you get only £50K back, and be chased for the whole £200K?

InMyDreams

Loughton_Monkey wrote: »

True. The mortgage and linked bank accounts work smoothly together. At the time I had them fully "offset", though, I was rather worried about how FSCS would treat things if the bank went bust. £1K in current account and -£1K owing on mortgage is one thing. If you had £200K in current and -£200K mortgage, would you get only £50K back, and be chased for the whole £200K?

I think if that happened, it wouldn't make any difference whether offset in mortgage account or in linked savings account. To protect against that the money would need to be in a separate bank altogether, thereby eliminating the point of having an offset mortgage (except that you you always stick back in when you felt safe to do so).

jamesd

InMyDreams wrote: »

If he takes the money back out to buy that car, it clearly could be cheaper than taking out a car loan, but does he understand why or how or will he end up paying that car off over 30 years (or even not at all?)

Well, the part about making the car repayments back into one of the mortgage accounts should cover that.

Loughton_Monkey wrote: »

At the time I had them fully "offset", though, I was rather worried about how FSCS would treat things if the bank went bust. £1K in current account and -£1K owing on mortgage is one thing. If you had £200K in current and -£200K mortgage, would you get only £50K back, and be chased for the whole £200K?

You'd get nothing back and have no mortgage owed if it was with a bank. To get access to the £200,000 again you'd take out a mortgage with another company. You'd lose nothing, except that access to the money while you arranged another mortgage.

Building societies can be different because only banks are covered by the common law right of offset that causes this effect. But most of the mortgage deals from building societies will have a contractual right of offset instead.

penguingirl

Just to echo what others have said really- We have a FD offset mortgage and I think it's fantastic. We put payments into the mortgage and (we have tested it) can transfer it out again just like any other account (obv only upto the maximum of our mortgage amount). Because there's so much flexibility we don't have to worry about having savings for a 'rainy day' so I like that all our money is going towards reducing our mortgage. We've only had it 12 months but I think it's very satisfying watching the value of our offset increase, and our interest decrease.

In terms of the logistics of paying interest and capital- we have a DD for roughly what the interest was when we first started (although it's now decreased, and we may adjust DD sometime soon or obv if interest rates up as we have a tracker) and then we both pay a lump sum in which covers the capital (and a bit more).

Also as another note- I like FD because you can have loads of accounts linked to it! So OH and I both maintain individual current accounts and savings in addition to a joint account (and an empty joint savings as we just put in the mortgage account) and all of these accounts are included in the offset.