taking out an extra £10 or £15k on offset mtg

longwalks1

I currently have the following mortgage with First Direct:

£106k outstanding
£180k house value
£30k in my savings account, which is offset against mtg (fixed for 5 years at 4.99%, 3 years remaining)

My monthly payment are £724 pcm and i have 18 years remaining. If i was to draw another £10 or £15k, how much would my repayments go up roughly if i wanted to keep the period the same?

Hope ive given you all the info you need

Thrugelmir

Draw the savings out or increase the mortgage?

jamesd

Removing £10,000 from the offset account would cost you an extra £41.58 a month. £62.38 for £15,000. Removing all of the £30k from the offset account would cost £124.75 a month. These are fairly easy to calculate because it's just the interest rate to consider, no need to consider capital repayment because it's your own money.

If you took out £15,000 from the offset savings account and wanted to accumulate that much in the offset account again (a bit like a repayment deal) you'd have to pay the £62.38 interest and £15,000 / (18 * 12) = £69.45 into the offset account. So that would be £131.83 a month total to get back to where you are over 18 years. Not quite right because at some point the mortgage value outstanding will drop below the offset account balance, but this is close enough to work with.

If you want to increase the mortgage balance, perhaps because you want to spend all £30k plus another £15k then it'd be reasonably close to £724 / 106 * 15 a month more for the extra £15k borrowed (capital repayment over 18 years plus interest) plus the £124.75 a month in extra interest you're paying by not having the money in the offset account. First Direct would tell you the exact figure but this is close enough to work with.

Assuming you have similar terms to me First Direct will have set a limit on your mortgage account and you may find that you're already approved to draw more money from the mortgage account up to the loan to value that was originally agreed. Just give them a call and check, they are helpful enough and there's no need to go through a full application process just to check how this bit of your mortgage works.

Thrugelmir

jamesd wrote: »

Removing £10,000 from the offset account would cost you an extra £41.58 a month. £62.38 for £15,000. Removing all of the £30k from the offset account would cost £124.75 a month. These are fairly easy to calculate because it's just the interest rate to consider, no need to consider capital repayment because it's your own money.

Providing the mortgage repayments are maintained at the initial level. Your calculation omits the effect of compound interest. As interest is calculated monthly.

As each £41.58 repaid. This saves 7p of interest in the following month (average basis). So interest would be calculated on a balance £41.65p lower. Every month thereafter follows a similar pattern.

jamesd

Those numbers don't assume that repayments are maintained at the initial level. First Direct will increase the monthly payments by the amounts given as the amount in the offset account drops. The capital repayment part will remain at the same level even though the interest portion and total monthly payment changes.

The numbers didn't ignore compounding. They are the annual amount divided by twelve and there's no variation in capital to allow for, so annual divided by twelve produces the correct answer, aside from the variations in the number of days in a month.

Each £41.58 does not reduce the mortgage balance in any way and your reduction of the interest due assuming it does is incorrect.

If the mortgage balance was being increased on a repayment mortgage you'd be closer to being right because part of the £41.58 would be a capital repayment, but those numbers are just reducing the offset interest saving, not touching the capital at all.

Thrugelmir

jamesd wrote: »

Each £41.58 does not reduce the mortgage balance in any way and your reduction of the interest due assuming it does is incorrect.

The interest earnt on the offset account reduces the mortgage balance every month. The next time interest is calculated on the mortgage balance, it will take into account the reduced balance. Resulting in a lower monthly charge. So as the monthly mortgage repayments are fixed and do not take into account the interest earnt on the offset account. This will result in the capital balance owing being reduced.

jamesd

Thrugelmir wrote: »

The interest earnt on the offset account reduces the mortgage balance every month. ... So as the monthly mortgage repayments are fixed

That's not how my FD mortgage works. Money in the offset account reduces my monthly payment. No reduction of capital happens. Maybe you or britishboy have a different variety?

If the monthly payment is fixed then the effect of withdrawing the money from the offset account would be an increase in mortgage term.

getmore4less

jamesd wrote: »

That's not how my FD mortgage works. Money in the offset account reduces my monthly payment. No reduction of capital happens. Maybe you or britishboy have a different variety?

If the monthly payment is fixed then the effect of withdrawing the money from the offset account would be an increase in mortgage term.

I thought most offsets gave you the option to fix payment or have variable payments.

If fixed payments(based on a repayment schedule) then the offsetting will potential reduce the eventual term, taking the money out just reduces the effect of that reduction from the shortest possible target it does not increase the term.

jamesd

Right, it won't increase it beyond the original term, just back to closer to that, instead of the shorter term with the offset money in place.