Offset Mortgages -- the Numbers

jamesd

1,800 is steep. It's appropriate where the mortgage amount is large enough to make a higher fee to get a lower interest rate a good idea or possibly where the person taking out the mortgage is not eligible for prime rate deals and has to go sub-prime. Also for buy to let sometimes.

If you just asked for the lowest interest rate you'd get deals with high initial fees. Say you worked out that it'd take five years to repay with the Egg mortgage. Then ask about deals with the lowest total cost including all costs including fees, surveys, legals over a five year mortgage term. Tell them that you see it'll take however long with the One Account and you're looking for a cheaper deal for the same time. Total cost over that short repayment term is the key number for you to be using for comparison.

You'd want to use a mortgage broker, not a financial adviser, for this sort of thing. Also note that financial advisor might not be quoting you from the whole market and definitely won't be if it was just a bank. Not just one broker either, try a couple or three.

Definitely ask C&G what they offer. It might not be the best rate but it might be cheaper after fees, survey and legals.

You don't actually have to go for that very short term, better to start out longer to give yourself a safety margin and do some flexible overpaying. You'd probably also fail an affordability check on the really short term, but no problem to go longer and pass it, then make exactly the same payments as you planned.

AloneWithStrangers

MarkyMarkD wrote: »

Hi and welcome.

As I've posted before on this thread, if you don't want the money back it's definitely cheaper to take a "standard" mortgage and simply overpay. But make sure that it's a "standard" mortgage that allows you to overpay sufficiently without penalties.

The only reason it's worth having an offset is if you need the money back at some point and can't simply remortgage at that stage - but even then if you take a sensible flexible mortgage you could draw down overpayments at that stage.

Yeah but . . you're working on the basis that the Offset mortgage is a higher rate than a non-offset mortgage which isn't necessarily true. if you have a offset & non-offset mortgage that are the same rate, the financial impact of offsetting should be exactly the same as overpaying only with the additional flexibility of having instant access to your cash.

Although most flexible mortgages let you borrowback your overpayments you need to think about a) it's a pain to ask your lender to do it & b) I think they all have the right to say "No". If you have an offset, you don't have to ask & you're in control.

With reference to my previous post, I rang Egg over the weekend to enquire about their fixed rate. The deal is:

5.39% for three years
£499 fee
Free survey & free legals
Offset
Penalties for 3 years (which is fair enough)
Pay off up to 10% of the balance a year without paying a penalty
The overpayment from the offset and the balance I pay off every month don't count towards the 10%.

If my maths are right on my mortgage (repayment with about 15 years left and a balance of about £110,000 left and my meagre £6000 of savings) I can pay off about £16200 this year without penalty - about 15% of the balance.

Now the only thing I have to do is find that much cash lying around . . .

myrtle_2

I don't know what to do, my fixed rate is about to end and have sought advice from an Independent FA - recommended by friends - he recommends an off-set tracker for the lifetime of the mortgage as it'll pay it off more cheaply.....£995 fee + YBS exit fee which kind of puts me off.
YorksBSociety have offered a fee free fixed rate of 6.39% which works out at about £20 more than I currently pay.
I could have a fee free offset tracker with the YBS at 1.19% over the base rate...

No idea what to do for the best....any ideas?

Bluebell_Girl

This is my first post but I am getting really confused about whether an offset mortgage is worthwhile or not.
We will be re-mortgaging soon for £118K over 20 years and were looking at an offset mortgage to reduce the term of the loan.
We have long term investments which are extremely tax efficient and we do not wish to touch as they are put aside for university fees and retirement
We intend to save a regular monthly amount of £600 ish but will dip into this through the year for holidays etc.
There would be at least £4K a month going into our current accounts but again this would be either moved to the savings pot or spent during the year as our outgoings are quite high - one of us is also a higher rate taxpayer.
First Direct are currently doing an offset 5 year fixed deal at 4.99% which is actually the lowest rate I can find for any type of mortgage - but I may have missed something cheaper. The fees for this are £600.
IF.com's calculator suggests we could cut 6 years off the mortgage by offsetting but could we achieve this anyway with overpayments?
Could someone who understands these things give any advice?

jamesd

AloneWithStrangers, if the rates and fees aren't higher then offset is free extra flexibility and is worth going for.

mytle, life of mortgage trackers do avoid the need to remortgage in the future and that's particularly interesting in the last ten or so years of a mortgage. Can't say much about your choices because you didn't give the current interest rate, the YBS interest rate or the amount of savings you might offset with each month or at the start and your tax bracket. In general, a life of mortgage tracker will benefit from paying more initially to get a lower rate because the plan is to never change deal until the mortgage is repaid.

Bluebell Girl, if you are investing you can expect to gain more from investing the money than you'd save from offsetting. So in that case the offset makes sense if the deal happens to be cheapest. It doesn't seem that your cash-equivalent savings as opposed to investments in shares, funds etc. are going to be high enough for offsetting to produce a significant gain for you but no harm at all to take an offset deal if it's the best around anyway.

I'm wondering if offset deals might be becoming more competitive because people offsetting reduce the need for the lender to raise extra money to lend to others. Lots of competition for savings at the momen.

gil13

Hi Jamesd, I have read through this thread with great interest. Regarding in particular this first direct offer of 5 yr fix at 4.99% or the 10 yr at 5.15%, fees of 299 + 299. Is this not a great offer for anyone that is thinking of taking a fix rate with no extended redemption penalty, even if they were not initially thinking about offset? All the current fixes over similar periods seem to be quite a bit higher and with less flexibility.

jamesd

It looks like a decent offer given current interest rates. It probably won't look so good in six to twelve months. There's merit in the idea of taking a low fee variable rate tracker for a while to benefit from expected rate drops.

myrtle_2

Thanks for that, here's another question....

I have 11 years left on the mortgage, I owe just over £30,000....would you go for a tracker or a fixed rate?

I like the sound of First Direct....my gut feeling is to make life easier (but not necessarily cheaper) is to stay with the YBS and go for a short, fee free, fixed rate...but then my money saving head kicks in and says ....naa, sort it out!...What would you do?

gil13

jamesd, and there lies the rub, what will interest rates be over the next year, some say cut aggressively, others leave alone, whilst others say trim but no more. who knows really, not sure anyone really knows what's best. i think the idea of going onto the SVR could be o.k, but will be quite shock if you go from a cheap fix to an SVR of 7.5%. perhaps future rates are going to be 0.75 either way from where they are now, so maybe fixing for a longer term if the numbers add up is the way to go even though like you say you might get something cheaper in the future. quite a difficult call to make in the current climate.

jamesd

myrtle, I'd go fixed rate:

1. Your mortgage owed is quite low so future arrangement, survey and exit fees will be an increasing part of the cost of future deals, making it increasingly hard to get as good a deal as you can get today.
2. Less chance of having to remortgage while temporarily unemployed with a bad mark on a credit record.
3. The range of available mortgages starts to drop below about 20,000 owed, and drops much more below 10,000, so you have many more options now than later.
4. It's settled, no more need to think about remortgaging.

gil13, variable capped deals are also available and can block that shock potential.