Offset Mortgage

Janierog

I have read about these mortgages and "think" they may be suitable for us - however not having a Masters in finance - though I am proud of my 2 0 levels I was wondering if anyone could advise.

We are mortgage free but want to buy another home ( rent our present one to tenants )

We would be using our 200 k savings to use as a deposit on the next house and getting a mortgage for 170 k over 10 years - with a overpayment of a thousand pounds each month. We have about 7k going into current accounts monthly but obviously with a new mortgage -overpayments and other outgoings we will not have a lot of savings to "offset"
Considering the amount going through our current accounts can anyone advise if a " offset" mortgage might be useful to us. Any advice would be welcome - I hope my post is not too confusing !!!
Thanks

SilentBob

My wife and I offset (only £1000 a month), basically it just means that you pay no interest on your mortgage on the amount in the offset account, so basically if for arguments sake you had £10000 in your offset and had £100000 left on your mortgage, you only pay interest on £90000.

The question is where will you be able to get a decent rate on your savings (my personal mortgage is at 3.99% APR) with instant access?

Janierog

That's where I get confused as we won't have a lot of savings initially as we will have used our savings as deposit - we will probably leave around 10k in our current account as a emergency fund and use most of our salaries to make overpayments and spend money on the house - I think what I am trying to say is will any money in our current account be as useful as that in a savings account - even more confusing would it be better to pay the overpayments each month or build up a savings account to offset the mortgage - I hope that makes sense.

Morgage_Confused

the benefit of an offset to you would be the fact that you wouldent have to push all your 200k at the mortgage. Just pay enough to satisfy the LTV required to secure the mortgage and then use the rest of your cash to offset the mortgage. so you always have access to it should you need.

this is of course assuming a better rate of interest on the mortgage than obtainable via savings.

Janierog

Perhaps I should have asked which is the fastest way of paying off a 10 year mortgage early with our financial situation as outlined in earlier post ?

Incidentally 1 of my 0 levels was in " confusing others "

Seriously the priority is getting the mortgage off as fast as possible - we agreed it over 10 years with a view if our circumstances stay the same we could make extra payments - if things went belly up then we have the security of using cash from the 1st house.

Morgage_Confused

but you asked "can anyone advise if a " offset" mortgage might be useful to us"

anyway..
the fastest way of paying off any mortgage is to overpay? if you have nothing to offset just take a mortgage with the best rate you can find. offsets no longer have comparable rates, except perhaps first direct.

pauljoecoe

I you get a First Direct mortgage for 170K and also open a current account with them your 7K per month income will go into your current account which means you will not pay interest on the 7K part of the mortgage. i,e. Your mortgage will only be 163K when that 7K goes in.

Therefore you what ever you have left at the end of the month (eg you spend 6K during the month and have 1K left over) could stay in the current acc. offsetting the mortgage or you could transfer it into a savings account also linked to the mortgage (This doesn't really make any difference but may be useful to keep it clear in your mind whats what)

With FD you can have as many 'savings' accounts offset against your mortgae as you want. We have one for me and my wife and anither which is earmark for our kids uni fees.

Of course if you ever need any of the overpayment back you can just withdraw it from your savings or current account as you need it. You can also decide how much monthly payment you want to make off your mortgage.

FD do have a range of offset mortgages but need 25% deposit.

Joe_Bloggs

The to the answer can be found in Locoblade's excellent mortgage comparison spread sheet. It works also on the mac ,Excell, OpenOffice, LibreOffice etc. It does offset versus savings comparisons as well as comparisons between different mortgages.

If you had a 170K offset mortgage @5% over 10 years assuming 3.5K average in current account and 1K per month deposited into offset accounts then after 5years 10 months there would be approx 72K left on the mortgage and 72K in offset savings.

Try it for yourself.

J_B..

getmore4less

The amount going into the account each month makes a tiny difference.

The amount left when the next amount goes in is what makes a mortgage work.

One think you need to do is structure the debt so you get interest relief against any rental income.

As has been said once you go down the offset route you borrow as much as you can subject to rates and fees and offset the surplus. but also for as long as you can, no point in a 10y loan if you can get a 25y one at the same rate.


Overpaying and offseting do the same thing to the total cost so offseting is usualy best because you keep access to the money.

Bottom line is spend less you pay the mortgage of quicker, obvious yes it is, but it is that simple, all the other things you do make small(tiny) differences to the end result.

Janierog

You guys have been brilliant - I am finally getting it - well very nearly - please don't roll your eyes at my last little question ( I am nearly there)

It was suggested to ? take the mortgage over a longer period - wouldn't we be better off ( financially ) to do the 10 years and throw as much money into the house as we can or are you saying that if we take over a longer period then we would have more savings each month to make bigger overpayments and that would end up paying the mortgage of quicker and cheaper ?

Thanks for your patience and taking the time to help

getmore4less

Term is only relevent when setting up the mortgage to determine a "normal" payment and the final date it must be completed.

Once set up it is the payment/savings that determine how much you pay in interest and the real term you can ignore the initial contactual term.