Mortgagely miffed

matimage

Hi All,
I sort of have a grand plan to pay off my 22 year mortgage in around 10 years. I owe 150k. I am self employed and have done fairly well in the last couple of years and managed to save around 25k. I have this money spread amongst an ISA and a couple of high interest accounts.
I have no other depts or credit cards.
Because I am self employed I wanted to have a years worth of earnings put aside (12k), my wife is a teacher and has a good income so this is why I only need to pay myself 1k a month.
I don't consider my mortgage as a debt but after a chat with a mortgage free friend of mine I am inclined to change my mind.
He reckons I should open one of these one accounts that combine everything and just chuck all my savings into that and not worry about having a years earnings set aside, just dip into the one account if I need to.
I think it may sound daft but it reassures me to look at my savings and see a nice amount of money accruing interest. Am I being stupid here and this is all pschycological and I should just chuck all the savings at the mortgage?
Also, these one accounts tend to be higher interest rates although they stress that you cannot compare the rates to normal mortgages, for example, the One account has a graph thing that says if I manage to pay it in 10 years the rate works out at 3.3%!
Sorry to have waffled on a bit but any advice would be greatly appreciated.
Thanks,
M

silvercar

Always compare the interest rate.

Any offset mortgage means that your savings are accessable should you need them and your money is earning interest effectively at your mortgage rate- you just enjoy the interest as reduced mortgage payments rather than interest being paid to you.

If you have sufficient savings it should be worthwhile, though do watch the interest rate. Intelligent Finance, RBS, One Account, Yorkshire, Coventry all do offsets, some with linked current accounts some without, so do look around.

matimage

thanks for that, anyon else?

matimage

is it right that I should only consider these mortages/accounts if I have 48% of what I owe in savings?

luckyfool

The % figure that people calculate varies but the principle is the same. I have heard figures bandied about from 30-50% as the amount you should have in savings to make offsetting worthwhile. The principle is that you need a substantial amount to be offset against the mortgage to make up for the fact that the offset rates tend to be higher than the best available on non offset type mortgage rates. Obviously Offset Mortgage Providers tend to dispute this.

i.e. You could theoretically have the option of a rate of 5% on your mortgage for a standard deal, or 5.5% on an offset rate. You also need to take into account what net rate you would be getting on the savings if you had it in the most cost effective savings accounts.

Given that your savings (@ £12,000) could be in ISA's earning more than 5% tax free if you use yourself and your wives ISA cash allowances over a 2 year period, and your savings are less than 10% of your mortgage balance I would tend towards the idea that you are better off financially having your savings in the best instant access ISA accounts and your mortgage on the best non offset deal. Another factor is that you are unlikely to be able to get an offset mortgage with a fixed rate(though Northern Rock's fixed rates are flexible allowing overpayments and drawdown of overpaid funds without notice).

None of the above should be construed as mortgage or investment advice . . .

matimage

Thanks for that lucky fool but sorry i wasn't clear, i was aiming to have 12k savings but i actually have 25k.
does that affect what you said?

luckyfool

I would still tend towards the best non-offset deal and the rest in savings unless you can get a really sharp offset rate. If you can give up instant access to some of the cash then many lenders would allow you to overpay a big chunk of your cash against the mortgage, 10% with many lenders. Many will then allow you to use that "overpayment reserve" in the future to take payment holidays or underpayments, and in some cases such as Northern Rock, draw the funds back down if you need them.