General beginner mortgage questions

BaconandEggs

Looking for some advice on the following:

What are the disadvantages of an offset mortgage?
What would be the calculation required to determine whether it was worth ditching a fix?
How is "the overall cost for comparison" calculated when mortgages are advertised?

kingstreet

Exam conditions?

BaconandEggs

Did sound a bit like an exam didn't it?

I've wondered about 3) for a while - and I think I know how it is calculated but there a lots of people on here with a lot more knowledge on the subject than me (something to do with the set up fee spread over the duration of the fix?). So just wanted to confirm my suspicions.

2) - would involve consideration of charges involved in leaving a fix vs amount saved on lower interest of an alternative (although that would involve a prediction based on rate changes).

As for the quation 1) - no idea really.

kingstreet

I can't think of any disadvantages of offsetting. Reduced payments, no tax as no positive interest paid. What's not to like?

Worth ditching a fix is pretty straight forward. I think there's a calculator knocking around on here somewhere. Difference in monthly payments minus cost of penalty shows gain or loss as case may be...

Cost for comparison takes initial rate, follow on rate, lender's legal fees, other fees, sticks them in the Kenwood, mashes them all up and comes out with a figure none of us have any idea is relevant.

As a broker, I tend to use the initial rate and the setting-up costs as my main criteria to shortlist possible recommendations. Then I look at secondary issues like penalties, discharge fees and reversion rate. Finally, I look at lender service and reputation. Sometimes deals are so thinly separated a client can pick one because they simply don't like one lender compared with another.

mustang1

kingstreet wrote: »

I can't think of any disadvantages of offsetting. Reduced payments, no tax as no positive interest paid. What's not to like?

Worth ditching a fix is pretty straight forward. I think there's a calculator knocking around on here somewhere. Difference in monthly payments minus cost of penalty shows gain or loss as case may be...

Here's the ditch your fix calculator link

http://www.moneysavingexpert.com/mortgages/fixed-mortgage-calculator

BaconandEggs

Thank you!

Are the rates for offsets generally worse than other forms of mortgage?

dimbo61

Example the difference between a YBS 5 year fix is 3.99% fixed and 4.09% offset 5 year fixed!!

BaconandEggs

Seems like it would be worth going for the offset.

Is the "one account" a type of offset mortgage.
I remember someone explaining the disadvantage of this to me.

There was also another reason that the mortgage advisor we spoke to gave as a possible disadvantage to offsets - but I can't remember what it was.

Why doesn't everyone go for an offset mortgage based on that extremely small difference in rate?

kingstreet

One Account is a current account mortgage, which is a different thing. That uses your salary and outgoings to reduce your balance at different times of the month. The rate's pretty lousy IIRC.

Offset is pretty much you have a mortgage account and a savings account. One is negative because you owe money. The other is positive because it contains your savings. You give up the interest on your savings to reduce the interest you pay on your mortgage.

There are one or two on here who do a far better job of explaining it than I do.

InMyDreams

BaconandEggs wrote: »

There was also another reason that the mortgage advisor we spoke to gave as a possible disadvantage to offsets - but I can't remember what it was.

Could it be the temptation to spend your pot of money on stuff other than paying off your mortgage? It effectively means that re-releasing equity is potentially much easier than if you'd over-paid a mortgage. If you *need* this flexibility, then great. If you are likely to abuse this flexibility though temptation just because you can, then this could be a real danger and it's possibly not the product for you.

Another reason that is sometimes suggested as a disadvantage to having a saving pot offset against the mortgage rather than actually overpaying a regular mortgage, is that if you ever fall on bad times and are in need of benefits, your savings pot may be taken into consideration when calculating what you are entitled to, where the balance of your mortgage is not. If, in such a situation, you just paid off the mortgage with your saving pot to avoid this, it may be seen as deprivation of assets so wouldn't work as a solution.

dimbo61

The beauty of a offset mortgage is that you build up savings in the offset account until you have £16K in savings and then overpay the mortgage!
We have done this and now have enough overpaid to have a " mortgage holiday" of upto 10 months
Great flexability and good rates