Fixed Rate Mortgage vs Offset Mortgage - Am I missing something?

wookie6

Hi,

We have recently been looking at fixed rate mortgages vs offset mortgages.

Assuming a fixed rate mortgage over 5 years for 4.5% vs an offset mortgage over the same term for 4.25%, if both products have the same fee and if for example we are able to save £1000 a month on top of our mortgage payments, is the trade off with the two mortgages simply discipline and having access to the savings if required?

i.e. Presumably the best option here would simply be to take the 4.24% fixed rate mortgage and overpay by £1000 a month if you can guarantee you wont need the savings at a later date or am I missing any other factors?

Thanks again for any advice!

ACG

Even if you do need them at a later date you can usually withdraw the overpayments on an offset.

Usually though, offset mortgages cost more than fixed rates.

wookie6

I guess what I'm thinking is that perhaps you could have two wages coming into your account and on top of that you may want to have 1x - 1.5x your wages again in savings set aside in case you get into financial difficulty, and therefore you would not want to include these 'contingency' savings in any overpayments on a fixed rate mortgage, therefore on an offset mortgage this 'contingency' can be working for you by reducing the loan amount you are having to pay interest on.

Equally you may want to save extra for a holiday, new kitchen etc and whilst you are saving for these bits, again these funds can be offsetting the total loan amount you are paying interest on.

What I can't work out is what this is actually worth each month!

getmore4less

Overpayments on an offset will likely have the same restrictions as overpayment on any deal with the same lender.


Some are structured as overdrafts so are not real offsets.


Offset funds will be accessible except if the lender goes bust then they may be used to reduce your debt


There are fixed rate offsets available.


Loads to think about critical is what the margin of higher rate costs you for the flexibility.


One use of the flexibility(when portable) is to reduce the requirement to get new lending if you move, handy for those that got the great tracker rates a few years back(base+<1%)

ACG

Nobody can answer that question, but you can have a mess around with an offset calculator - here is the first one I found on google - http://www.natwest.com/personal/mortgages/offset-flexible/offset-calc.ashx

im not recommending natwest in anyway.

getmore4less

wookie6 wrote: »

What I can't work out is what this is actually worth each month!

on a £5k holiday with a 3% mortgage that would be around £12.5pm


but if you could have got a 2.75% mortgage with 1%net saving then that is reduced £7.30 but then you have the money that could have been on 2.75% not 3% so the £7.30 is wiped out if you have £35k not offset




Temp(month to month) savings save very little it is the permanent/longer terms offset funds that make offsets work(just like over payments work on other mortgages).


If you look on the offset thread I have put the calculation on there on how to work it out based on the mortgage rates against savings(net) rate.


One of the best things with a decent offset tracker is you never need to mortgage again unless you move so no more fees.

getmore4less

ACG wrote: »

Nobody can answer that question,

It's just numbers so relatively easy to calculate for anyone with numeracy skills once you have some real data.

ACG

getmore4less wrote: »

It's just numbers so relatively easy to calculate for anyone with numeracy skills once you have some real data.

Exactly.

Everyone I have ever met always underestimates their monthly spending. So even with real data its likely to be out.

Cyberman60

Offset mortgage is the best. With mine, I don't actually have to repay it but define which accounts I want to offset against the mortgage. For instance if your mortgage is 250K and you have 150K in your current account declared as an offsetting account you only pay the interest on 100K. As monthly salary would go directly into the main account this will effectively reduce the next accruing monthly interest payment in real time.

It's much more flexible than a fixed rate mortgage as I can repay any time if I want but can also access those repayments. I keep a very large sum in my offsetting account and effectively use it as a low cost equity release as I am retired. I'll only repay when the full term is up.

getmore4less

Here is a post from the mega offset thread that has the calculation based on rates and savings.


https://forums.moneysavingexpert.com/discussion/comment/50879345#Comment_50879345


its a good starting point.


With cash flow the easiest calculation is to assume you spend all your money at the end of the month this is the same as one extra payment, so any mortgage calculator can be used to give you the max saving from offsetting spend money if the spends are spread relatively even over the month do 1/2 as an extra payment.

getmore4less

ACG wrote: »

Exactly.

Everyone I have ever met always underestimates their monthly spending. So even with real data its likely to be out.

Real data would be what's left at the end of the month, how big that emergency fund is, what is being saved for that kitchen and holiday.....


Very easy to model and give ranges to cover variables like spends.