FTB Offset Mortgage - question re: withdrawing money

Dubito_ergo_sum

Hi

One of my friends mentioned that he wants to use his savings of 15k for an offset mortgage towards a 100k house. Then he said that a few months after he has got the mortgage he will withdraw 5-10k from the 15k to use towards a car.
I was under the impression that the offset amount is locked in to tie in with mortgage rates, originally he would have a 85% mortgage but after the car purchase it would be more of a 90-95% mortgage, is this possible or has he just got some facts mixed up?
would he be forced to go on SVR in the 90-95% scenario or even reapply for a mortgage, Im not too familiar with mortgages myself so

Thank you for reading this and any advice given, it is appreciated

jamesd

The offset amount is not locked in. It's normally just a standard savings account and any money that happens to be in it reduces the amount of money borrowed for the daily interest calculation. Some also offset money in their linked current account and that's pretty handy.

I'm not sure that your friend understands how an offset mortgage works, though. If the £15k is used to get a loan at 85% loan to value he will not be able to withdraw any money above that 85% level. The deposit doesn't go into an offset account, it goes into equity in the property so he has £15k in the property and £85k loan. He would not be able to withdraw the £15k or any part of it because it was needed to get the 85% LTV deal and he can't withdraw it from the house.

If he got the mortgage and then put another £15k into the offset account he would be able to withdraw the money from that account at any time.

If he got a 90% LTV deal and put £5k into the offset account he could then take out the £5k whenever he wanted to. But the higher interest rate for a 90% LTV deal might make it not worth doing.

Your friend could look very carefully at mortgage interest costs and loan to value because even small things like putting normal expenses on a 0% for purchases credit card for a while could allow him to get a lower LTV and save mortgage interest. Though this isn't always the best thing to do.

It is possible that he's considering a lender that will arrange an extra advance above the mortgage LTV. I don't know of one but one might exist.

MFSaver

Your friend is mistaken. Usng your 100k house example, your friend has a deposit of 15k which means he can get a mortgage at 85k. He cannot increase the mortgage simply by withdrawing his deposit. He needs his lender's permission to increase his mortgage. The deposit is not the same as savings used in an offset mortgage.

If he had savings of 20k, he can use 15k as a deposit to get the 85% LTV offset mortgage and put in 5k as savings against the offset mortgage, which has the effect of reducing the principal for the purposes of calculating monthly repayment and interest. He can continue to keep the 5k in there, or withdraw the 5k, which in turn will increase the monthly repayment and interest. He cannot touch the 15k until he sells the house.

Dubito_ergo_sum

Thank you very much, it makes perfect sense. The car purchase is to replace the current car which may last another few months or another few years so the aim is to use the car purchase money in the wisest way for mortgage purposes in the meantime. So would it make more sense for him to go for a non offset mortgage and use the money as lump sum overpayment ? Would this mean he would only be entitled to mortgage holiday in lieu with the overpayment or would he be able to withdraw the overpaid money again when needed for the car? Thanks a lot

MFSaver

Non-offset mortgage - In short, you cannot withdraw any overpayment. There are a few, uncommon non-offset mortgages that allow you to do so, but in general, no withdrawal possible.

However, in your friend's case, this is irrelevant since he will need the 15k deposit to get the 85k mortgage and as we established, the 15k cannot be withdrawn. He could try for a 90-95% LTV mortgage but the rates for those are much higher than the rate for a 85% LTv mortgage.

kingstreet

Chances are he won't be able to re-draw any overpayments due to the loan to value. If you take Nationwide as an example, re-draws are only available upto 85% of the loan to value.

He either puts the money in to increase his deposit to get a better mortgage deal or he puts down a lower deposit to use the residual cash to replace the car.

There's no cake and eat it option.

jamesd

First you need to know if your friend is planning to use the money to get a lower LTV and lower mortgage interest rate. If yes, then the money won't be available after getting the mortgage whatever mortgage type he uses.

If your friend plans to regularly accumulate £20,000 or so of cash in the offset account then an offset mortgage may well be of value to him. If he won't offset at least £10,000 it'll probably be more expensive than a non-offset mortgage in interest rate and not of direct benefit.

Something like the First Direct offset mortgage is also an interest only mortgage so he may well benefit from that, if he can get to the 75% or lower LTV required to qualify for that mortgage. this can benefit him because he can make capital repayments into the offset account or into the mortgage account and withdraw them later, effectively building up a pool that he can borrow from instead of paying personal loan or car loan interest rates in the future. It's one of the things that can make interest only superior to repayment, provided he has the discipline to really repay the money.