Overpayments vs shorter term mortgage

_Ed

Hello,

I'm after advice/opinions regarding mortgages.....

My wife and I are first time buyers. We have joint income of around 130K (split about 50% each), and have saved 200K for a deposit, plus another 20K for stamp duty and fees. We’re looking at a house budget of 500K, 300k loan, so LTV 60% @ 2.3x joint salary.

Most mortgages I’ve looked at around these numbers have monthly repayments around 1.6k pcm (assuming 4% interest. From long term planning perspective I'm using 6.5%, which gives monthly repayments 2k pcm). As I don’t see any reliable returns from the stock market or saving cash, I want to use overpayments to bring the mortgage down as soon as possible. Realistically we could afford to pay in 2.8k pcm.

Obviously a longer term mortgage would give us the flexibility to stop overpayments in the case our situation changed. However would there be any financial benefits of taking out a shorter term mortgage vs significantly overpaying a regular longer term one? Do you know any mortgages which may suit in either case.

Thanks in advance
Ed

harvey115

Overpayments by default shorten your mortgage term usually unless instructed otherwise.

Now there is usually a question regarding access to additional money if required.

Since you mentioned that you would have good amount of money to go for savings or otherwise overpayments to get a better return (tax efficient as well). I would be also inclined towards Offset mortgages, this will give you the added benefit of having the savings at hand in case you need them in emergency and on the same time work as overpayments.

Barclays (Woolwich), RBS (& Natwest), Clydesdale and many other Building Societies are currently offering Offset mortgage deals as well. If you meet Barleys lending criteria I would personally got for them.

Jock_Tight

Likewise I would also recommend an offset mortgage, gives you access to savings in an emergency while also reducing the interest owed on the mortgage.

_Ed

hmm, well I started to read the sticky on offset mortgages and got as far as the second para before it started to get complicated! Might have to grab a coffee and sit down for a while to get my head round it.
Thanks for the replies.

Jock_Tight

Offset mortgages are quite simple.

Lets say you have a 300k offset mortgage at 4% and savings of 20k. By offsetting the savings against the mortgage you only pay 4% on 280k so its as if your savings are making 4% net.

Now if you also offset a current account it means whatever is in that account also reduces the amount of interest you pay on the mortgage. The good thing is you still have access to this money, its not locked away.

I have an offset mortgage with RBS, I can overpay as much as I like and no early repayment fees.

getmore4less

Offsetting savings it is the same as borrowing less but still having a line of credit at the mortgage rate of the ammount in the offset accounts.
You can also look at it as temoprary overpayments.

Saving earn the mortgage rate is an incorrect model, that give the impression the higher the mortgage rate the better the savings which is clearly nonsense.

Offsetting current accounts makes very little difference, MAX saving is the equivilent of ONE extra payment the same as the income, more likely to be much less.

Jock_Tight

getmore4less wrote: »

Saving earn the mortgage rate is an incorrect model, that give the impression the higher the mortgage rate the better the savings which is clearly nonsense.

The higher the mortgage rate the better your savings are working for you. So with a regular mortgage @ 4% unless your savings are making 4% net you will be worse off.

Savers have been shafted over the past few years while mortgage rates have started to creap up, so chances are you may save more with offsetting savings as mortgage rates go up.

And if they dont, you still have access to the money so you can pull it out the offset and put elsewhere.

getmore4less

Jock_Tight wrote: »

The higher the mortgage rate the better your savings are working for you. So with a regular mortgage @ 4% unless your savings are making 4% net you will be worse off.

Savers have been shafted over the past few years while mortgage rates have started to creap up, so chances are you may save more with offsetting savings as mortgage rates go up.

And if they dont, you still have access to the money so you can pull it out the offset and put elsewhere.

You are not saving anything.

You are borrowing less.

As you say borrowing more makes sense if there are net rate available higher than the mortgage rate but that is not saving either thats borrowing money to invest.

jackomdj

another fan of the offset mortgage here. we offset all our savings as well as our current accounts. Additionally we run 2 credit cards, an American express which we get a good cashback rate for everything we spend on it (but not accepted everywhere) & an ordinary one. The two cards are paid off in full every month, but it means we keep the cash in our bank account for longer so offsetting more.

Obviously having credit cards is not right for everyone & only works if you pay off in full at the end of each month so don't get charged interest on them. Ours are set up to automatically pay off in full so we don't have to remember to get it paid.

slarty_2

I think the flexibiity of having access to your offset savings may be useful for some people, unless you have savings elsewhere you can get at if needed.

When I looked at offset mortgages I found the rates a bit too high - plus there's the danger of thinking "I'm effectively getting 4% net interest on my savings" but if that was the case a higher rate eg 5% would mean I'm gettng 5% net interest - its important to remember you're also paying 5% interest, probably on a much greater amount than you're savings.

I opted for a lower rate with unlimited overpayments - I got one with HSBC at 2.39%, i.e. BoE +1.89% for the lifetime of the mortgage. I think they're doing BoE + 2.49% for 1st time buyers - you'd need a pretty good offset to beat that and a lot of savings.

getmore4less

The diferencials can be quite low there has been times when the rates were the same with some lenders.

here is the calcs done in feb(rates have changed since then)

http://forums.moneysavingexpert.com/showpost.php?p=50879345&postcount=797