Overpayments and Offset Mortgages

japsybapsy

I'm no expert, but have you visited any websites that have mortgage calculators with overpayment calculations? An example is here . If I entered 250k mortgage with 5%, 20 years and an overpayment of £150 every month, then you would save over £21,000 and repay 2years and 8 months earlier. Granted, not as early as what you have described but I haven't added any lump sum payments, which you can do at this website.

Many more calculators can be found in one of the 'sticky' threads of this forum.

Hope this helps.

PURPLEGIRL_3

yes, been to both if.com and oneaccount websites to do this - thats why i'm confused, because of the massive difference it makes to the total amount payed. i'm trying to get my head round how comparable a mortgage can be if its a fixed period, which can then be remortgaged - just don't know how to go about comparing like for like here. and for that reason it seems easier to go down the offset path - because i can see exactly what i can save money and timewise with overpaying.

just need some help with how to get the best out of fixed 2yr mortgages in this same scenario..

japsybapsy

The one I have mentioned can be applied to fixed rate mortgages so will help you see the affect of overpaying on a fixed rate mortgage. It shows the time saved and amount saved. Is that what you are after?

jamesd

Purplegirl, if you're considering the One Account current account mortgage that has a very high interest rate, well above most offset mortgages, so it's not a good deal at all. The reason it looks good is just that they don't compare it to anything else.

To illustrate the difference you can use the One Account advanced calculator.

First put in the property value 340000, mortgage amount 250000, mortgage term 25 years and leave the rest alone.

Time to select a competing mortgage deal to use. I'll use the Newbury Building Society lifetime tracker at BoE+0.2% (5.2% now) for the whole life of the mortgage. You can make lump sum payments or overpayments of any amount, without charge, at any time during the mortgage term. Interest calculation is daily.

Now click on the word "Comparison" just above the figures you've already entered and put in 5.2 as the interest rate. Click on the Calculate button and you'll get the initial graph. Click on Savings above it and you'll see this:

Interest cost, One Account: 240488 Comparison: 197224, difference 43264 more expensive for the One Account. It pays off a little faster. Click on Costs and you'll see that the One Account payment is 1641, while the comparison is 1491.

Time to overpay a bit. Click the Savings pig on the left side and then on the Regular word at the top. Enter 200 as the Amount, 300 as the End month and click on the Add button then on the Calculate button.

Over to the right side and click on Chart, where you can see the One Account in red finishing significantly earlier than the Comparison. Click on Savings and you'll see: Interest cost, One Account: 180423, Comparison: 192703. One Account takes 19 years six months, Comparison 21 years 10 months. So why am I saying that the One Account is more expensive?

The One Account calculator is cheating.

Lets try another calculator, the Egg calculator. Same 25 years, 5.2% and 240000 mortgage, click on calculate. Total payable 429337, less the initial 240000 gives 189337 in interest. Notice that this is less than the 197224 the One Account calculator came up with?

The One Account calculator seems to be using a competing mortgage with annual interest calculation, where your payments and overpayments make no difference until a full year has passed. The One Account uses daily interest so the effect on it is immediate. The Egg calculator uses daily interest as well, giving a fair comparison.

Time to put in the overpayments, 200 a month in the monthly overpayment box and click on calculate. Total cost is 382886 less the 240000 borrowed is interest of 142886. Time to repay is 19 years 7 months.

So far we have:

One Account says it costs 180423 over 19 years 6 months
Comparison by Egg costs 142886 over 19 years 7 months

But there's a bit more to come. Remember that monthly payment for the One Account is 1641 and you can see that the Comparison is 1431.12? That's 209.88 available for extra overpayments on the Comparison to match the monthly payments on the One Account. Change the overpayment to 409.88 and click on calculate. 354324 total to pay, less the 240000 borrowed gives interest payable of 114324. Time to repay is 16 years 1 month.

Now we get the final comparison that really shows off just how bad the One Account is:

One Account says it costs 180423 over 19 years 6 months
Comparison by Egg costs 114324 over 16 years 1 months

One Account costs 66099 more and takes 3 years 5 months longer.

And now you know how to do a proper comparison of the One Account with it's modern competition: daily interest calculation flexible or offset mortgages.

This is why in the mortgage guides Martin says that the One Account current account morgage is a bad idea. It's a great concept, excellent customer service... and it's destroyed by it's way too high interest rate, otherwise I'd love to have one myself.

housebuyer_abc

silvercar wrote:

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

Be careful if you do this not to mix up company money and personal money it can very quickly erode all the savings if you get this wrong and the Inland Revenue assess it as income

PURPLEGIRL_3

wow james - that was exactly what I was looking for - I'm speechless!! but does that then not show the egg mortgage in a very favourable light? my broker has now recommended an A&L 2yr fixed at 4.74% which allows controlled overpayments - but i'm still trying to understand the offset method, and you've now convinced me the oneaccount is no good for me - but what about the egg mortgage then?

PURPLEGIRL_3

sorry, just checked it out - see you were just using the egg cal as an example..

so - anyone have any thoughts on Alliance & Leicester mortgages?!

jamesd

I was using the Egg calculator, because it does daily interest calculation and overpayments. But I was actually using the Newbury Building Society lifetime tracker mortgage interest rate. You can use the Egg calculator for any mortgage that has daily interest, not just the Egg morgage.

That A&L mortgage may well be a good deal, since you do have quite a high mortgage and getting the lowest possible rate is a good idea. Do watch out for the overpayment terms though:

"10% Overpayment Facility – Customers who choose one of these products will have the option of making a one off annual payment of up to 10% of the Interest Bearing Balance (IBB) on their mortgage (without incurring any Early Repayment Charge). Any such overpayment must be for a minimum amount of £500, over and above their monthly mortgage payment, and can only be made during each month of January which falls during the period which an Early Repayment Charge is payable."

I recall reading that the A&L mortgages use annual or perhaps monthly interest calculation instead of daily but that doesn't actually make too much difference if you can only pay extra once a year at the start and that payment is taken into account immediately. Check with your broker to ensure that it is. For any particular rate an annual or monthly interest mortgage is a bit more expensive than a daily interest calculation mortgage.

You might check the ING Direct 4.95% with 745 fee. As a direct mortgage it is not currently available via brokers and does not pay them commission. It uses daily interest calculation. You can overpay up to 10% whenever you like in as many chunks as you like and it has only a 1% early repayment charge on amounts above that if you want to pay more. Worth getting a quote or KFI from ING Direct to compare, though the broker may not think me for suggesting that you take a look at this one. You can use the Egg calculator to check this one, but not for the A&L unless it is also daily interest.

Yorkshire Building Society and Derbyshire Building Society do deals that are 250 or 40 cheaper over two years but have higher early repayment charges and initial fees that are included in the cost calculation. They also revert to a much higher rate after the fixed rate term ends, so they are less good if you remortgage late. I didn't check their other terms, other than both being daily interest.

PURPLEGIRL_3

thanks james - really helpful info again.

i think i have most of the info i need - couple of final things though. you all talk about remortgaging after the period finishes. are the fees associated with remortgaging usually stated in the key facts doc, because i can't find it in the one i've been sent? and finally, remortgaging itself - do you not have to pay loads of fees each time you do this, which make it expensive to do this every few yrs? am i missing something here?

jamesd

The fees for remortgaging are the exit or end of mortgage fees, ask about any fees you don't recognise. Early repayment charges are one of them.

For each remortgage you pay the exit fees from the previous one and the setup fees for the new one.

For your mortgage amount it's likely to be worthwhile paying those fees, since getting and keeping a low interest rate is a very big factor in how much the mortgage costs you. It is normally cheaper at present to do this remortgaging dance than to get a lifetime tracker mortgage.

If you do take one of the discounted fixed rate deals, the standard variable rate (SVR) that you pay is normally so high that it forces you to set up a remortgage to take effect once the term ends, so you never pay it. The ING Direct is something of an exception, since it's not actually too bad after the fixed rate term ends.

Comparison services, including those used by brokers, vary in how they handle the exit costs. You should check the best deals by adding up all of the monthly costs pus all of the setup and exit costs. That will give you the total cost for that mortgage for the term.

If it appears that a lifetime tracker might be competitive, given that it won't need remortgaing, you'd want to deduct the remortgaging costs from its future price. It's still not likely to make any lifetime tracker the best deal for you. The best rates now aren't in them and you will benefit from the best rate.

Just for fun, here's what the Egg calculator says about the ING Direct mortgage with 200 a month overpayment plus the difference between its monthly cost and One Account monthly cost in overpayment (total 415.71), compared to the One Account and Newbury example I used.