Repayment versus offset mortgage

evoke

I'm looking to settle a £72K balance on a repayment mortgage using the proceeds from the sale of my current property and then take out a much larger mortgage for my next home.

Essentially I appear to have the choice of a repayment mortgage or an offset mortgage. Say you're borrowing around £200K over 16 years, which one would you go for and why?

I do tend to save quite well so that's why the offset one is in the reckoning for me.

I'm looking for considerable flexibility from a mortgage.

redpete

If you are a disciplined saver there is also the option of a flexible interest-only mortgage. I.e. one which gives you the opportunity to overpay and maybe allow you to borrow-back any overpayments if and when necessary. This way you have control over where you put your savings - either offset against the mortgage or, if you can get a higher return on the savings elsewhere compared with the interest rate on the mortgage, in a seperate savings vehicle.

The discipline comes in not getting to 12 months before the end of the mortgage and realising that you are short of funds to pay it off.

A full offset mortgage (e.g. where your current account balance is used to offset the balance on the mortgage) is useful if you habitually run with a high current balance as long as you do not pay a premium on the interest on the mortgage. You do need to check the relative costs of the different types of mortgage, including set-up and repayment fees.

evoke

I've not been able to find anyone that offers a flexible interest-only mortgage! All the providers want a guaranteed means of paying the money back and when I mention a savings account or ISA they're not interested. That's why I looked at offset mortgages as these are essentially interest-only.

Thrugelmir

evoke wrote: »

That's why I looked at offset mortgages as these are essentially interest-only.

The offset facility is ancillary to the mortgage. Ultimately a mortgage is either on a repayment or interest only basis.

An offset facility is not a repayment vehicle in itself.

devildog

I would go for an off-set mortgage, switched to one of these myself approx 3 1/2 years a go and wish that I had done it sooner.In our case because endowment was/is not going to meet the 'target' figure. We were asked how we would repay and they were quite happy with ISAs, savings etc(not that we will need to use them)
What you can do on an offset mortgage is to reduce the total amount that you are allowed to borrow(if you want to) so technically 'repaying' your mortgage. In our case there were no set up fees, application was submitted and completed in under 3 weeks and the bonus was that our acct was credited with £500 as a welcome(didn't even know about that at the time!!)
The most difficult thing that I found about it was that, because I keep a written sheet at home of deductions/income it took a while to get my head around the fact that if I made a withdrawal I had to add it to my balance instead of deducting it.
Would thoroughly recommend.

evoke

One of the main reasons i'm considering an offset is that I know exactly how much of the capital I am paying off every month. My plan is to budget the payments as if they were a repayment mortgage (i.e. pay the interest + an overpayment each month). Then, as my savings accumulate, the net amount of the capital that I pay off will increase per month whilst the interest would decrease (assuming I keep the total amount I pay every month the same and interest rates don't change for a while).

I see this as a huge benefit over a repayment mortgage as that is loaded with interest early on so if you change provider or product after 2-3 years then you won't have made hardly any impact on the amount you have outstanding to repay.

TrickyDicky101

evoke wrote: »

One of the main reasons i'm considering an offset is that I know exactly how much of the capital I am paying off every month. My plan is to budget the payments as if they were a repayment mortgage (i.e. pay the interest + an overpayment each month). Then, as my savings accumulate, the net amount of the capital that I pay off will increase per month whilst the interest would decrease (assuming I keep the total amount I pay every month the same and interest rates don't change for a while).

I see this as a huge benefit over a repayment mortgage as that is loaded with interest early on so if you change provider or product after 2-3 years then you won't have made hardly any impact on the amount you have outstanding to repay.

There is no difference between what you propose and a typical repayment mortgage where you make overpayments (assuming no ERCs involved). The ONLY difference with an offset is you retain flexibility.

redpete

evoke wrote: »

I see this as a huge benefit over a repayment mortgage as that is loaded with interest early on so if you change provider or product after 2-3 years then you won't have made hardly any impact on the amount you have outstanding to repay.

??

Thrugelmir has already pointed out that a mortgage can be repayment or interest only. You can have a repayment mortgage with an offset facility or (possibly) interest only mortgage with an offset facility.

Any mortgage will have more interest at the beginning whilst the capital owed is relatively large, whether it's offset or not.

If you want flexibility then also look at those mortgages that have generous overpayment allowances, and the flexibility to take back overpayments if necessary. Offsets are a type of this but I think you need specialist advice before jumping into one or the other. I didn't go for an offset because the fees and interest rates made them more expensive than the flexible mortgage I've got now.

JimmyTheWig

It's sort of what Martin's old economics teacher would have called a "premium for liquidity".
You could go for a regular mortgage that allows overpayments. Then pay any spare money you don't need off the mortgage.
Or you could go with an offset.

The problem with the first option is that if you need that money (e.g. to do home improvements or you hit hard times) then you can't (normally) get it back. I.e. you lose your liquidity.
The problem with the second option is that rates / booking fees are normally higher than non-offset mortgages. I.e. you are paying a premium for the liquidity.

You need to work out how much liquidity you want (i.e. how much of your savings you want access to).
Then have a look at what's about and decide how much extra the interest rate / booking fee would be for an offset mortgage.
Then work out which would suit you better.


I had an offset (with egg) with my second place. Between arranging it and moving in I met my (now) wife and within months of me moving in we were engaged and expecting. Therefore my possibilities of building up a savings balance dropped pretty considerably and really I wasted the offset facility.

blueberrypie

evoke wrote: »

One of the main reasons i'm considering an offset is that I know exactly how much of the capital I am paying off every month. My plan is to budget the payments as if they were a repayment mortgage (i.e. pay the interest + an overpayment each month). Then, as my savings accumulate, the net amount of the capital that I pay off will increase per month whilst the interest would decrease (assuming I keep the total amount I pay every month the same and interest rates don't change for a while).

I see this as a huge benefit over a repayment mortgage as that is loaded with interest early on so if you change provider or product after 2-3 years then you won't have made hardly any impact on the amount you have outstanding to repay.

What you describe doing with an offset mortgage is actually exactly how a repayment mortgage works.

The idea of "loading interest" near the beginning of a repayment mortgage is misunderstood - there are not two pots marked "capital" and "interest" and a lender standing over them deciding to put the money in the "interest" pot first. If you borrow £100k, you pay interest on £100k in the first month. In the second month you pay slightly less interest because you owe slightly less (having paid off a small amount of the capital in the first month). Towards the end of a repayment mortgage, most of your payments go towards capital because you owe less - and so you are being charged interest on a smaller amount. The higher proportion of your payment going towards interest in the early years of a mortgage is because *you owe more then*, not because the interest is "loaded".

I'd suggest that before you take out a mortgage of any kind, you make sure you have it clear in your head how different mortgages work - it's the only way to be certain that you're making the right choice for you.

evoke

Thanks for the clarifications. It is obvious that I don't fully understand mortgages so appreciate the explanations and apologies for sounding a bit dumb!