First-time mortgage - to offset or not?

ginger_1

So we're in the fortunate position of outright owning our current house, and have never had a mortgage before, so I'm really not sure where to start, especially in terms of whether to offset or not...

Some figures: house value £150k, savings £150k. Both myself and my partner are higher-rate tax payers (just) and currently have no dependants, though we'd like to have children in the not too distant future, so outgoings likely to increase in future. Currently saving £2k-3k per month, and we're looking at houses around £450k-500k, so probably aiming for mortgages of around £200k (which seem to have repayments of about £1k per month?).

So questions: I've read that offset mortgages can be a Good Thing for those with savings and/or for higher-rate taxpayers, but why not just have a shorter repayment term mortgage if we can afford it? If we didn't think we need ready access to our savings, why pay extra interest over 25 years for this benefit? What is the tax benefit actually worth?

I'm guessing we need to find a good mortgage broker to properly work through this (do any specialise in offset mortgages?), but I'd like to be able to increase my level of understanding of this subject beforehand so I can ask the right questions!

Any advice welcome.

dimbo61

I love offset mortgages and we have saved nearly £75,000 in interest payments since we took our mortgage out.
We are with the YBS and they do an offset mortgage with " Friends and family"
The rates are nearly the same as a normal repayment mortgage but by building up savings in the offset account you are paying less interest and keeping a Good emergency pot ( which you can access easily) if the car needs replacing or you end up with a reduced income ( Mat leave!!!)
As an example £200K at 3.19% offset fixed for 5 years with YBS works out at £967.32 a month.
So you can either build up savings in the offset account or overpay the mortgage each month to reduce the term.

ginger_1

I wonder though... If we thought we could afford payments of, say, £1,500 a month, then would it be better to get a 25-year mortgage and overpay/offset the additional £500 per month on top of that YBS figure, or... (playing around with their mortgage calculator), get a 13-year mortgage instead (~£1,500 payments)?

I think a spreadsheet is in order.

ginger_1

Think I've managed to answer my own question - in terms of 'net position' at the end of 25 years, both appear to be the same. Does that sound right? Can someone check this working for approximate correctness, please?

Common to both options:
Borrow: £200,000
'Available' cash (for either mortgage or savings) best case: £2,000/month

Option 1 - Offset mortgage (25 year term)
First Direct 'Base Rate Tracker, Standard' @ 3.19% - monthly payment = £532 (interest only).
Pay £2,000/month towards offset mortgage - after 117 months the mortgage is 'paid off' (offset account + mortgage = net zero).
At that point start paying £2,000/month into savings @ 2.5% APR (but 40% tax).
After 183 more months (remainder of term), net position = £396k.

Option 2 - Repayment mortgage (15 year term)
HSBC 'Lifetime Tracker Special' @ 2.38% - monthly payment = £1,322 (repayment).
Pay £1,322/month towards mortgage, and £678/month into savings @ 2.5% APR (but 40% tax) - after 180 months the mortgage is paid off.
At that point start paying £2,000/month into savings @ 2.5% APR (but 40% tax).
After 25 years, net position = £397k.

Obviously all of the above would be 'best-case', as any number of things could affect monthly payments (redundancy, mat leave, etc), but the offset option appears to offer greater flexibility, in terms of not having to pay so much each month, plus having continual access to the savings in case of need.

dimbo61

If you take a 13 year term then you have to pay that amount every single month.
If you take a " Normal " mortgage term of say 25 years then you can always overpay each month to reduce the mortgage to 13 years and if you cant overpay you do not have too.
You are looking at a tracker deal ? Why not the long term fix? at 3.19%
You could also use Cash ISA,s and not pay tax on your savings ??

getmore4less

ginger_1 wrote: »

I wonder though... If we thought we could afford payments of, say, £1,500 a month, then would it be better to get a 25-year mortgage and overpay/offset the additional £500 per month on top of that YBS figure, or... (playing around with their mortgage calculator), get a 13-year mortgage instead (~£1,500 payments)?

I think a spreadsheet is in order.

term make no difference

the only thing that counts is net debt so the payment/offset

armour

Hi ginger, my preference would be with the flexibility of an offset but maybe you should max up your pension contributions rather than pay 40% tax on savings (or earnings).

ginger_1

Dimbo, I'm not sure about fixes - still learning about all the different types of mortgages - perhaps you can explain why they're so good? I think it's true that rates are at historic lows? (BoE+1.88%), so why not lock into this rate now? I personally believe that rates will stay low for the next 2-3 years, negating the benefit of all but the longest (most expensive) fixes. If we locked into the 5-year YBS fix, it is quite likely, should rates increase in the meantime, that the delta to the BoE rate will then be greater at that point, leaving the remainder of the mortgage more expensive? Does that sound reasonable?

dimbo61

Crystal ball time?
BOE triple AAA rating now gone and money may! become more expensive to borrow ( I do not work for the government in finance anyway)
As you say rates have never been this low and I like the security of a long term fix when we paid 4.74% for 5 years!! BUT WE overpaid and saved in the offset account as much as possible every month so now nearly fully offset after 7 years.
It is all about your lifestyle and if you are a saver or spender and if you want nice holidays/cars/houses or happy to be debt free ASAP?
Your decision