Do I fix, ride it out on variable, or offset??

sthomas150_2

Do I fix, ride it out on variable, or offset??
Firstly many thanks for taking the time to read this epic but I have broken it down to make it easier to understand. Any advice is always very grateful.

Here is where I am currently:
My Woolwich 5yr fixed rate is due to end in July – what shall I do?

Mortgage 1 £70000 - reverts to 0.95 above Barclays Base Rate
Mortgage 2 £37000 - reverts to 1.49 above Barclays Base Rate

I’m currently paying £620 a month (£420 for Mortgage 1 and £200 for Mortgage 2) and making £200/month overpayments.
I have £50,000 total savings, £25k in ISAs at 3% average and £25k in savings at 2.8%

Option 1 –Fix
I have looked at various fixed rate products, the best two are:
*3.99% fixed for 4 years with current provider Woolwich and no arrangement fee
*4.59% fixed for 5 years with Nationwide + £99 fee and £275 deeds release fee from the Woolwich

The 3.99% option would make monthly repayments £560/month, saving £60 a month compared to current payments. This product is classed as a remortgage so application only lasts for 30 days not 6 months

Option 2 – Variable
BoE base rate stands at 0.5% so currently my rate reverts to 1.45% on Mortgage 1 and 1.99% on Mortgage 2.
This would make total monthly payments around £400/month, saving about £200 on current payments. I still intend to pay ~£600 a month AND the overpayments of £200 a month (to Mortgage 2 which is at a higher rate)

Yes, rates will be increasing come August-ish time but do I stand to save more money by keeping my ear to the ground and riding this variable rate out as long as possible and then fixing with current provider when it looks like its going above 5%, which is what I currently pay.

I found a forecast of Interest rates on thisismoney.co.uk - they predict Interest rates to rise by:
"0.25% in August to November,
1.25% in year 1,
1.5% in year 2,
and 3.25% in 5 years" http://www.thisismoney.co.uk/interest-rates

This predicted increase would make Mortgage 1
0.75% from August 2011
1.75% in 2012
2% in 2013
Up to 3.65% till 2016

This predicted increase would make Mortgage 2
1.74% from August 2011
2.74% in 2012
3.49% in 2013
Up to 5.14% till 2016

Option 3 – Offset
£50000 in savings means only paying £57000 Mortgage.
Woolwich have offered an offset tracker 2.78% above Barclays Base Rate. This is a ‘mortgage current account’ (like the One account) so I don’t think it links into savings accounts elsewhere as I have read on the offset thread.

I’m less appealed by this option as 2.78 above BR could actually cost significantly more than the other options in a short period of time but the whole point of the offset product is you keep it for a long time. The Woolwich would allow me to switch to a fixed rate at any point but would likely to charge arrangement fee to do this (£499 or £999)

?
I'm leaning towards riding it out on the variable rate while overpaying on the Mortgage 2, which is half a percent more. What would you suggest

Thanks all

getmore4less

The barclays offset is a fully functioning offset with current accounts and savings accounts, also allows cash ISAs. and single named offsets even with a joint mortgage

If you want to keep access to your savings then if your mortgages came with reserves(most do), you could just overpay the current mortgages and you can get the money back from the mortgage reserve but at the SVR.


I would stop overpaying if you stay on the variable there are savings account that give you better rates than the mortgage will cost.


I would keep the current loans and look for savings that track but at a higher rate than the mortgage or monthly savers which giove a good rate.

These low rates will not bee seen again for some time and once you change you cannot get them back.

You don't need to fix.

Thrugelmir

Personally I would continue with the variable rates. As GM4L says, these rates will never be obtainable again. While savings rates are available above the mortgage rate. Then save as opposed to overpaying the mortgage.

Joe_Bloggs

My view is by reverting to the low variable rates you get the choice of what to do with your repayments whilst they still are low. The risk is interest rates rising.

However you have 50K in savings that leaves a net mortgage of 57K
As it is a repayment mortgage then this value will shrink with mortgage payments ,mortgage overpayments or savings payments. In time the 'net mortgage' will approach zero. Then it does not matter what interest rates are providing you can get the same rate or more for your savings. So what you have is a DIY offset.

I hope to be 'net mortgage' free in two years

Interest rate rises are less of percentage a shock to those with short terms left on the mortgage or making significant overpayments. My ratio of capital to interest per mortgage payment is over 8:1.

It would be foolish just to make overpayments if you can get a better rate of return via a range of savings options or have debts at higher interest rates.

J_B.

Biffins

Stay on the variable. Stop overpaying, and put your money in a higher paying savings account or ISA.

getmore4less

I think savings rates will track up with base rate rises initialy so only the net debt will be costing the higher mortgage rate.

sthomas150_2

firstly a big thanks for the numerous prompt replies.

The consensus seems to be to ride out the variable rate and make up the difference in savings. Do you think it worth while to apply for a fixed rate product as a backup? Applying for a fixed product will last for 6months and cost me £99 to apply (with Nationwide). I'm quite happy to do this every 6 months, but only if I need to.

GM4L and Thrugelmir- Do you think riding out the variable rate is a long term venture (5 years+) being I suspect you right in saying it wont be this low for many years.

Thanks again

Scott

Thrugelmir

sthomas150 wrote: »

GM4L and Thrugelmir- Do you think riding out the variable rate is a long term venture (5 years+) being I suspect you right in saying it wont be this low for many years.

In my view, yes. Over time mortgage rates will normalise as base rate rises. So there won't be the variation in mortgage rates on new products that we are seeing now.

Saving towards or reducing the mortgage by £400 a month (until base rate rises) is a significant sum. This in itself will reduce the amount of interest you'll be paying. The less you owe, the less interest you'll pay. Far easier to focus on that fact than changing base rates over which there's no control.

dimbo61

Save yourself the £99 arrangment fee and stick with your plan of going onto the 2 deals you already have and either build up savings in cash ISA,s or regular savers or overpaying the mortgage.
You have a great savings pot

hillcats

Have you considered the option of fully offsetting your mortgage and just paying back the capital?

sthomas150_2

Hillcats - yes that's option 3. But unlike your 0.62% +BoE the best rate I can find is 2.78% +BoE.

Thrugelmir - Thanks again for the response. Can you elaborate when you refer to normalizing of mortgage rates? I don't feel like I can say its ever seemed normal since I joined the property ladder. I've only ever known it to increase up to the the credit crunch and decline from the recession. Do you mean the fixed rates/products for certain LTVs will be similar and effected less by changes to the base rate? (hope that makes sense??)

Many thanks in advance

Scott