Offset Mortgage Disappointment

Xantos

Very disappointed in my offset mortgage. It seems that each time the payments have been amended, the mortgage provider has lengthened the term of the mortgage. Instead of a term saving of about 36 months, it looks like I have only achieved about 10 months.

This appears to have occurred during the many interest rate changes between 2004 and 2009. But the worst case occurred during repayment of of an interest only part of the loan. The monthly payment was reduced by more than it should have been, increasing my term by a whopping 9 months.

This happened despite my choosing the “reduced term” option over the “reduced payment” option. Large amounts of my savings have been in linked accounts, but it seems to little benefit. OK, I have not directly lost, as my capital has reduced by the amount of interest saved. However my mortgage term has not been reduced as much as it should have been, as payments have been lower.

It appears that the offset mortgage may not have been correctly managed by the provider. After many discussions with the provider, I have only received bland replies instead of specifics.

I can elaborate on how I calculated the term, should anyone be interested. The mortgage provider does not advise of the term reduction earned.

I suspect many others may be in a similar situation, or will be when interest rates change soon. Have I been mis sold this mortgage product?

Thrugelmir

2004 was 11 years ago. Why only complaining now?

Trentenders

Surely having an extended period on an interest only portion of a mortgage is a good thing...

TrickyDicky101

Do you believe you have lost out financially as a result?

dimbo61

Now as a HUGH supporter of Offset Mortgages I fail to understand how you would not notice that your mortgage payments were not reduced every year since 2004.
You have used the offset facility to reduce your mortgage debt and by now should be able to increase your mortgage payment to give you the end date you want.
Mortgage Free is a great place to be :j

Xantos

- The anomaly only became apparent 2 years ago, when a large lump sum was paid back, and I started to do some calculations myself.
- Perhaps I have not directly lost out financially, but the whole idea of tying up my savings, and foregoing interest on them, was to reduce the term of my mortgage by the offset arrangement. If the interest rate had not changed this would have happened. But by setting a longer term than that earned each time the rate changed, and lower payments, the term reduction was severely diminished.
- When the bank set a new payment at interest rate changes, like everyone else, I just paid it.
It was only recently I did some calculations and established what was happening - that each time the term had lengthened and the payments were less than they otherwise should have been.

silvercar

However my mortgage term has not been reduced as much as it should have been, as payments have been lower.

If you now reduce your mortgage by the savings you have been making each month by having lower payments and by keeping the mortgage payments going forward at the same level as they are now, you should knock a fair bit off the end date. Almost as much as if you had kept the payments at the same level from the start.

Have I been mis sold this mortgage product?

No, an offset mortgage gives you options. Luckily you can now use those options to reduce the term.

getmore4less

Contractual term is not relevant other than to set payment.

The interest is calculated on the net debt after offsetting

Once your offset matches your outstanding debt your interest is zero.

How quickly you pay off your debt is up to you.

The contractual payment makes no difference, if you want to reduce the term pay more off the capital rather than offset it.

Thrugelmir

Xantos wrote: »

But by setting a longer term than that earned each time the rate changed, and lower payments, the term reduction was severely diminished.

Term is contractual so remains the same. Requires both parties to agree to the change. Only you can instigate a change request. Other wise the status quo will be maintained.

When interest rates change lenders will automatically recalculate payments over the remaining term. That's how their systems work.

silvercar

My offset mortgage offers a choice:

a) you have monthly payments set as if the offset savings account is empty. Any amount paid over and above the interest (calculated as the capital borrowed less the offset savings account) can be used:
i) to reduce the term or
ii) to reduce the outstanding capital
or b) monthly payments are set at the interest on the amount outstanding (calculated as the capital borrowed less the offset savings account)

Xantos

Thrugelmir is absolutely right in saying “When interest rates change lenders will automatically recalculate payments over the remaining term. That's how their systems work.”

However I think this is the crux of the problem. The mortgage offers 2 choices as to how the offset benefits are applied: 1. Reduce the term or 2. Reduce the payments. The bank has confirmed that this is a reducing term offset mortgage. I have calculated what I call the “achieved” term (ie the term remaining given that the offset arrangement has enabled more capital to be paid back, and hence reduced the nominal 20 year term). At each recalculation, the payment the bank has asked for is such that the term they have reset to is much more than the achieved term. In other words, although I earn a reduced term, they have kept on increasing it such that the overall effect is I do not significantly reduce the term of my mortgage.

Why did I want to reduce my term? I had an endowment policy that came up about £20k short. I planned to deal with this through the offset mortgage arrangement, and had achieved interest savings (which equals capital paid off, which should have equalled a term saving enough for me to still pay off the £20k within the original term of the mortgage). Imagine my horror when some early calculations showed the the term was not that significantly reduced, and I would still have to find most of the £20k.

Eventually, I figured out that the term was being increased at each recalculation by the bank.

Examples:
The interest rate changes at nominal term of 190 months remaining.
Term achieved before the change:175 months
Term reset by bank to:182 months
Reduced term lost: 7 months

The interest only portion partially repaid at nominal term of 128 months remaining.
Term achieved before the change:107 months
Term reset by bank to:116 months
Reduced term lost: 9 months

Further details:
1. This is how I checked my mortgage.
2. Take the capital outstanding figure, and take off any interest only portion.
3. Take the monthly repayment, and take off any monthly payment for the interest only portion.
(you can use an online mortgage calculator to work it out, eg crislis.co.uk have one under “extras”. This one is handy because it deals in months not just years.)
4. Using an online mortgage calculator, enter the capital remaining from 2 above, and the annual interest rate.
5. Enter the remaining mortgage term, press calculate, and adjust the term and repeat until the payment figure is within a pound or two of the monthly payment from 3 above. (Eg if the payment has to go down, the term has to go up).
6. This gives a rough figure for the “achieved” term.

By doing this calculation with the payments and interest rates before and after an interest rate change, an estimate of the change to the term can be arrived at. It will be more noticeable if the interest rate was in place for a few months before the change.

OK, that's quite complicated to explain. But put simply, this is a reducing term mortgage. It appears to me that the bank is wrong in increasing the "achieved" term at each recalculation.