Offset Mortgages -- the Numbers

jamesd

The saving from having the current account part is the mortgage interest rate on the average balance that you keep in the current account to cover bills. So if you had 3,000 going in and were left with 1,000 and the bills were evenly spread it would be interest on 2,000. That's 105 in the first year if you get no interest on the alternative current account balance, compounding in later years. If there is interest paid on the other current account that would reduce this difference - if it was paying 4.25% interest before tax, 3.4% after the cost would drop to 37,

Up to you to decide if using different accounts to make it easier to manage your money is worthwhile.

You don't mention how often you plan to take money out and that's what decides whether you need a current account, offset, flexible or non-flexible mortgage. Since you don't mention plans to take money out regularly it seems that a flexible mortgage with drawdown facility for possible occasional withdrawing could suffice. If you want that 10,000 more readily available an offset account is handy since that's set up for more convenient withdrawing.

wolds_lady

I am about to sign up to a 5 yr fixed rate mortgage with FD. Though, I am still unsure of just how much to borrow. They have agreed that I can borrow £80k.
But that includes 70K to pay off old lender and a 10k offset loan for home improvements.
Now, as this is a remortgage, I have 21 years to run.
Was wondering, i have 20K in ISA savings and probably a savings balance of 1500-2000k with the lender. Would i really benefit from moving everything across into this savings account? I have messed around with all the mortgage reckoners and am a little confused. I was told that I can have the 10K offset loan, as its free?? I only ever pay capital or interest on it, if i draw it down! But that then equates to £80k for the sake of having a 10k cushion that i can have whenever i want, without using up my actual savings. If i waited 10 years before drawing down this 10k, do i only have the remainder of the term to pay it off? thanks in advance

jamesd

If you borrow 80k you can immediately put 10k into the offset account to draw on. For a repayment mortgage I expect the repayment part to immediately start to repay 80k but only pay interest on the 70k, that is, 80k minus the 10k in the offset account.

If you take out the 10k you'll start paying interest on whatever you take out. What happens then depends on the option you choose but the basic one is that the mortgage payment would increase by the interest on that extra 10k of borrowing.

If First Direct tell you that you'll only repay that 10k if you draw it, that is something that they could do, so you should clarify with them and if you know that you will want the 10k, ask if you can start to repay it immediately.

If you can get an ISA savings rate higher than the mortgage interest rate you're probably better off leaving the money in the ISA account(s). In that case it'll earn more in savings interest than the mortgage interest paid by not having it in the offset account.

wolds_lady

James, FD insist that there are NO charges capital or interest on this additional borrowing of 10K until i actually start using it? I am most confused.
I have been trying to get through to them for the last hour to clarify it... but without luck. How can they do this, surely the banks dont do things for nothing?

jamesd

wolds_lady, it is possible for them to do it that way if they want. That would mean that you would have an increase in repayments if you used it, since you'd have to pay it back over the remaining duration of the mortgage.

MarkyMarkD

FD don't do "repayment or interest only". They only do interest only. So moving money from the mortgage to the savings/current account makes no difference to the required payments.

FD quote how much extra you need to add, on top of the compulsory interest only payments, to repay the mortgage over your selected term. But it's up to you whether you pay that amount, or more, or less.

ConfusedBorrower

Currently re-mortgaging my property as my attractive -.11% tracker runs out on 31st May.

I have selected the FD 5 Year offset Fixed Rate at 5.29% which has total fees of £697, including valuation - I intend to pay this off in the style of a re-payment mortgage. Alternatively I could stick with my currect lender and get a 5 year fixed rate at 5.83% with no fees.

Details:
House Value = £500000
Mortgage = £165000
Term = 14 Years
Monthly Payment = £1395.60

I'll also put a minimum of £5000 pound (possibly £10000) into the linked offset savings account to reduce the amount I'm paying interest on. The alternative would be to take the current providers 5.83% deal and pay that £5000 off and just re-mortage at £160000.

My "million dollar question" is (like so many on this thread) do you think, based on my details, the FD product is the right one for me OR am I being blinded by what seems a good deal given the current climate. I have a young family and the security of having the same regular payments and the "apparent" flexibility of the FD offset mortgage seem attractive.

Any advice gratefully recieved.

jamesd

MarkyMarkD, thanks and that means that it would have to be repaid over the remaining term of the mortgage if it was used.

chas2008

Help!, I have an offset mortgage with I.F. at the time it seemed a good idea, like many I want to be mortgage free, having looked at there on-line demos I thought this would be the ideal solution.
I have had this mortgage for nearly 5 years and during this time I have on many occasions requested some form of statement to see my current position/term reduction, apart from one phone call where I was given approx 12 months reduction and this seemed unclear im certain they just made a figure up, all the contacts (e mails) I was given the same reply,’ the calculation is to complex’. About 6 months ago a figure of £1,975 –interest saved, (on £10,000 savings)
appeared on my mortgage summary, a step in the right direction. A couple of months ago the figure of 3 months term reduction appeared, after over paying £1,800 ,which they call built up reserve for some reason, and saving £1,975 in interest the figure of 3 months on a mortgage payment of £740 per month somehow doesn’t seem quite right. I have fed all these figures into there on-line demo and it comes up with approx 13 months reduction, is it me? or have I missed the point somewhere ? all I want is to see my mortgage reducing and some form of realistic feedback , not too much to ask. I can’t be the only customer of there’s with this problem. I have come very close to changing to Nat West who offer the same product and they assure me the figures are calculated monthly. Any suggestions would be greatly appreciated.

StuartGMC

chas2008 wrote: »

I have come very close to changing to Nat West who offer the same product and they assure me the figures are calculated monthly. Any suggestions would be greatly appreciated.

Chas, we have had a NatWest repayment offset, since remortgaging at 12yrs position in July 2006 for a further 10yrs (so can't comment on IF specifically ) but can confirm the following:

NatWest do provide regular statements on a quarterly basis where they show you the savings MADE by offsetting. This is simply showing the interest incurred (mortgage) and that gained (current and savings accounts, with tax at 20%) for the accounts if separate, vs. the actual position because you did offset. They give a running total of the cash saved since starting the mortgage (which of course has gone straight against the capital).

You can of course see the result as well, because our interest payments have been decreasing recently as we have rebuilt some savings; nice to see when interest rates are still rising (0.25% uplift just applied by NatWest).

They also give you information on your anticipated date to clear the mortgage based on current balance, repayments and interest rates. They note that this can be improved by future offsetting (but obviously can't give precise values as they don't know what you'll have in place and daily fluctuations). I think this means they are providing more detail than IF?

As above, we re-mortgaged at 12yrs for a further 10yrs; in the past 20months we have further reduced time to repayment (as we over pay at around 40% each month at the mo) to clear at about 7yrs on present basis, in total saving at least 6yrs on the original 25. I hope to further improve on this balanced with other aspects.

I don't think NatWest allow you to offset against a cash ISA (no immediate benefit, but the cash is then there in ISA form once mortgage is cleared). I believe Barclays used to allow this and IF do?

Personally, I would always go with offset of savings and current account, but then the latter is a reasonable proportion of our outstanding capital (to cover for business expenses before reimbursement etc) as we are well into the term.

As you have an offset then you'll know the tricks of maintaining a high cash balance to offset, (plus flexibility, extra drawdown etc) the calculators in this thread will help, but my feeling is offsetting only really works once you have >25% of the capital available as savings. Prior to this, get deals with lower interest rates.

Then it is simply good management of cash flow; it took a while to get used to buying the "groceries" on credit cards, but all items which are not SO and DD (apart from the drinks in the pub!) are on the card, which is then scheduled to be paid in full 4-5 days before due. For us, this means our mortgage rate is about 3.0-3.3% at present. We have other investments which don't offset, but, these are for 5-10yr growth in Stocks & Shares ISAs, otherwise we could virtually offset to 100% but not get the possible growth. It's all about balance of course.

HTH
Stuart