Overpayments and Offset Mortgages

PURPLEGIRL_3

Hey all - hope you can help.

We are looking to buy a house for around 340k, and taking out a 250k mortgage - however the deposit will leave us with very little in savings. My husband earns a decent salary and I have a p/t job, and we are very disciplined with our monthly spend, so much so that we expect to be able to overpay by £100-200pm.

The question is, are offset mortgages the way to go? We've got some advice and have been recommended if.com, but they have numerous mortgages and i don't really know which is the best to go for.

Basically, because we intend to overpay, is offset the way to go? People keep saying you need to have savings to make it work, but if we want to regularly overpay, surely this is the best way to pay off the mortgage asap? theoneaccount shows us that with overpayments, we could pay off a 20yr mortgage in less than 13yrs which we'd love to do - am i reading this right and if not, is there a better way of doing this?

Thanks in advance!!

nrsql

Do the sums.
Check against flexible and discount mortgages.
Take into account the max overpayments allowed and money being held in a savings account while waitin to be applied to the mortgage.

I would be surprised if an offset would be best due to the high interest rate which will leave you with less money to overpay.

PURPLEGIRL_3

sorry, not smart enough to do the maths myself!! not sure how to do the comparisons, and i made the error of telling a broker that we would prefer the offset freedom and now finding that we're only getting advice on offsets.

all we want to do is be able to use approx £2300pm for the mortgage, and we thought that saving maybe £300-400pm would offset against the mortgage and end up costing us less. will a standard mortgage with overpayment options allow us to do this better? and if so, any recommendations?

nrsql

Hopefully some of the mortgage people will be along soon to give some proper analysis for you.

Have a look at flexible motgages - you should be able to get that at a lower rate and hence overpay by more than the 300-400 per month.

If you don't want the facility for taking money out of the mortgage then look at discounts (check how much they allow to overpay) which should be lower rate still.
here's a mortgage calculator
http://www.mortgages.co.uk/

IF offset is 5.74%
repayment 1571.26

IF 2 year discount 5.39%
repayment 1518.84

ybs 2 year discount 4.55%
repayment 1396.69
That's probably less than the repayments on the offset even after 2 years of £200 overpayment - and you would have that extra £370 ish a month - the product allows 10% overpayment per year.
You would have to remortgage after the 2 years though.
This was just the first I came to for comparison. Your broker can do better I'm sure. Just ask what's best for you without leading him.
Did he send you a document saying what your requirements were?

PURPLEGIRL_3

thanks - this is obviously something i need to look into even more - and no, he didn't ask me my requirements - all done over the phone, he was recommended by a friend.

like the look of the new ing mortgages too - anyone have any experience of those?

hopefully i'll get some more reponses tomorrow!!

jamesd

Offset sounds good until you do the calculations. Sadly you're then likely to find that the higher interest rate for an offset mortgage makes it cheaper to use a flexible mortgage.

Take a normal mortgage and a Ruffler Bank cash ISA. The ISA pays 5.75 and hasn't yet been increased to reflect the rate change this month. That's probably higher than your mortgage interest rate so it pays not to offset, because you make more money in the ISA than you save in mortgage interest. You do need 3000 for the ISA initially so you can't do this immediately.

You can use regular savers paying 12% and 8% before tax to accumulate the money for the ISA. Those also pay more after tax than a mortgage costs before tax, so they beat offset mortgages as well.

I did the calculations for a Woolwich offset mortgage a few months ago. Even the couple in their own offset example were worse off than if they'd gone with their lifetime tracker mortgage instead.

So, offset is a nice concept, shame it doesn't currrently deliver a benefit for people at your level of offset savings. One person needs to be offsetting more than 3000 a year to beat the ISA, a couple more than 6000. And more still once you factor in regular saver accounts for a year or two.

You could benefit from an offset mortgage if you had lots of money coming in and going out each month, say 30% of the mortgage value.

You might also find the active topic Is Interest Only the way to go? of interest, since it actually pays to go interest only and save the difference between repayment and interest only at the moment.

PURPLEGIRL_3

hmm, my husband is planning to go contracting soon and so net income wise we should be doing very well for around 6-12 months, maybe longer - would that then be a good reason to go the offset road, as alot of money would be flowing into the account?

silvercar

PURPLEGIRL wrote:

hmm, my husband is planning to go contracting soon and so net income wise we should be doing very well for around 6-12 months, maybe longer - would that then be a good reason to go the offset road, as alot of money would be flowing into the account?

very good, stick the tax money into the offset and benefit from the reduction in your mortgage interest until the tax bill becomes payable.

Leon_W

As the loan size is relatively high and you have no savings to offset then you would be better off taking a "standard" type of mortgage with a facility to overpay.

Halifax and Abbey will allow you to repay upto 10% of the outstanding amount each year without penalty (even during the Early Repayment Charge period) and Nationwide allow up to £500 per month as a regular overpayment.

I'm pretty sure that quite a few of these lenders mortgages would work out cheaper than an offset for you.

Regards

nrsql

PURPLEGIRL wrote:

hmm, my husband is planning to go contracting soon and so net income wise we should be doing very well for around 6-12 months, maybe longer - would that then be a good reason to go the offset road, as alot of money would be flowing into the account?

Almost certainly not.
I think offsets are only useful for people with a lot of money going into their current account and they never utilise a savings account (like an e-saver).
By a lot I mean several 10's of thousands.
Even then if you utilise a savings account you are probably better off with a discount.

In your case maybe you could use a flexible mortgage and take the money out at the end of the year - would need to test how quickly the money can be retrieved though.

PURPLEGIRL_3

i'm still confused by the final figure here - ie the total interest over the course of the mortgage. doing a calc using the one account, overpaying and sticking in lump sums that will be earned, we could end up paying 360k total on a 250k mortgage. granted that we lose out in terms of savings and interested earned, but in the long run we have "only" payed 110k interest and the mortgage will have finished in 12yrs.

how does a standard mortgage beat that? even allowing ourselves to go down a 2yr fixed with possibly 10% overpayments, and even assuming we remortgage at a later date plus using the money saved with this method to invest in cash isa's and the like, are we really going to get a competitive total amount as above?

Or am I just looking at this whole setup wrong? Feels like a whole world of calculations is being scratched at by this thread, and any minute its all going to come tumbling down on me!!

What I mean is, am i looking at this incorrectly in terms of the whole idea of offsetting and the real benefits - i just can't see past the 2 figures of 350k and 12yrs - they just seem so tempting..

Help!!