Offset Mortgages -- the Numbers

goejk

Hi All,

I am currently trying to decide on a mortgage, but as everyone on here already points out, nothing is ever straightforward. The question of using an Offset or not just makes it worse.

I'm hoping that someone can help steer me in the right direction, or at least offer some 'light bulb' insight that will make my decision easier.

Here are the facts:-

We've just got married and are buying a house at £310k.
We intend to rent out our existing houses.
Have enough savings so could go 70% LTV or 80% LTV.
Earn about £7k per month between us.
Best deals I can find are:-

- Woolwich 2.47% lifetime tracker, 70% LTV, £1500 fees
- Woolwich 2.78% lifetime tracker, 75% LTV, £1500 fees
- Woolwich 2.79% offset lifetime tracker, 70% LTV, £2000 fees
- HSBC 2.99% lifetime tracker, 80% LTV, no fees

All allow overpayments without penalty.

Clearly, the difference between the 70% and 80% LTV is £31,000

I'm a higher rate taxpayer and my wife is basic rate.

We've got savings of about £150k at the moment, all earning pitifully low rates.

However, the following needs to be considerd.

1. My wife owes £76k on a property that is under a penalty charge for early redemption until December. Rate is 5.2% at the mo, so the intention will be to clear that with savings come the end of the year. We'll be renting it out, so a Buy-to-Let mortgage would be one option, but the rates are much higher.

2. I owe £250k on a property that I will be moving out of to renovate then rent out. The loan is at 2.5%, interest only at the mo. (£500 payable per month). Some funds (estimate £20-30k) will be needed for the renovation.

For these reasons, I'm being drawn to the HSBC offer, so as to keep the extra £31k on hand. It'll mean paying more in interest each year (circa £1k per annum based on £217k loan (70% LTV)). However, given that there are no upfront fees, then the concept to re-mortgage in a year or so is open, without it costing too much.

If there's anyone out there who can help with these types of conundrums, I'd love to hear from you. Frankly, we've looked at so many options and numbers that we're getting 'mortgaged out' and just need something that migth help to narrow it down.

Thanks in advance.

getmore4less

goejk wrote: »

Hi All,

I am currently ......

Thanks in advance.

Best to start a new thread

Anon

A few daft questions which I hope someone can answer for me please (and probably already answered, but cannot find it at the moment). With an offset mortgage, what happens if the offset is more than the mortgage? Would the target be 100% savings against 100% value of the mortgage? If the offset mortgage is 2.39% (variable), what rate of interest would need to be achieved on a savings account to make it more worthwhile to keep the money outside the offset (for a basic or higher rate tax payer).

Many thanks

Anon

vacheron

Hi. Yes, the target is 100% offset (savings=remaining mortgage) at which point you will be paying zero interest. Beyond this, any amounts above the 100% offset threshold do not earn interest and so should be syphoned into a separate interest paying account.

For a basic rate tax payer you would need at least mortgage rate +25% to break even with a tax paying savings account, (3%) A high rate tax payer will need to find a rate 67% higher than your mortgage (4%).

hendrichcarter

Thanks to this. This is a really big help.

pol28

A few years ago I took out an offset mortgage with Barclays. The mortgage is interest only and the rate charged is .25% over base rate. Over the next 2 years I paid off around 50K and reduced the mortgage outstanding.
I now want to raise my mortgage back to the original sum but Barclays say that I can only do this as a separate loan at a higher rate and cannot incorporate this within the original mortgage.
I have made all payments on time and feel that I am being penalised. I have a great deal of equity approx 50% so this is not an issue.

Anyone have any experience on this subject???

getmore4less

pol28 wrote: »

A few years ago I took out an offset mortgage with Barclays. The mortgage is interest only and the rate charged is .25% over base rate. Over the next 2 years I paid off around 50K and reduced the mortgage outstanding.
I now want to raise my mortgage back to the original sum but Barclays say that I can only do this as a separate loan at a higher rate and cannot incorporate this within the original mortgage.
I have made all payments on time and feel that I am being penalised. I have a great deal of equity approx 50% so this is not an issue.

Anyone have any experience on this subject???

I just got my overpayments back from the mortgage reserve account.

Check what your OD limit is on the reserve it is charged at the mortgage rate if you use it.

Anon

pol28 wrote: »

A few years ago I took out an offset mortgage with Barclays. The mortgage is interest only and the rate charged is .25% over base rate. Over the next 2 years I paid off around 50K and reduced the mortgage outstanding.
I now want to raise my mortgage back to the original sum but Barclays say that I can only do this as a separate loan at a higher rate and cannot incorporate this within the original mortgage.
I have made all payments on time and feel that I am being penalised. I have a great deal of equity approx 50% so this is not an issue.

Anyone have any experience on this subject???

With First Direct Offset, I have paid money into the mortgage part of the account then moved it into the linked saving (thus reducing then increasing the mortgage amount) and I feel sure that it just had a statement before confirming the transaction to the affect that it was interest only and you need to ensure that you have the means to pay off the capital at the end of the term.

I understand that we have the mortgage available for the complete term and can reduce or increase within the total amount borrowed limit as and when required - is that not the case?

Many thanks

Anon

getmore4less

Anon wrote: »

With First Direct Offset, I have paid money into the mortgage part of the account then moved it into the linked saving (thus reducing then increasing the mortgage amount) and I feel sure that it just had a statement before confirming the transaction to the affect that it was interest only and you need to ensure that you have the means to pay off the capital at the end of the term.

I understand that we have the mortgage available for the complete term and can reduce or increase within the total puny bottowed limit as and when required - is that not the case?

Many thanks

Anon

Not with Barclays you cannot draw down on the mortgage account there is a seperate account(mortgage current account) with OD facilities that contains the amount you can drawdown

vacheron

pol28 wrote: »

A few years ago I took out an offset mortgage with Barclays. The mortgage is interest only and the rate charged is .25% over base rate. Over the next 2 years I paid off around 50K and reduced the mortgage outstanding.
I now want to raise my mortgage back to the original sum but Barclays say that I can only do this as a separate loan at a higher rate and cannot incorporate this within the original mortgage.
I have made all payments on time and feel that I am being penalised. I have a great deal of equity approx 50% so this is not an issue.

Anyone have any experience on this subject???

This is the reason that I have left all of my savings in the linked savings accounts rather than paying down the mortgage account. There is no way that Barclays can reign in the overdraft facility using this method.

However as getmore4less mentioned above you should have a mortgage current account with a reserve facillity and this is effectively where you can see how much mortgage money is available to "draw down" at the mortgage rate.

Mine is currently sitting at 9.2K which I assume is a calculation based on the amount I have overpaid while the mortgage was on the "reduce term" option before I switched to the "reduce payments" option, plus perhaps some additional borrowing based on their currently estimated LTV ceiling and my credit rating?

Just speculation though.