Intelligent Finance - offset options where savings are greater than mortgage

jauntyangle

Hello everyone - first timer here looking for some advice.

I've recently got an Intelligent Finance mortgage, and am in the fortunate position of being able to offset most (and soon all) of the mortgage with my savings and current account.

IF give you three options for offsetting - shorter term, reduced debt or lower payments. I've rejected the lower payments, and selected "reduced debt" as a default when I set up the mortgage.

However, I'm now thinking that I should change to "shorter term" - my thinking being that as I'm offsetting 90-100% of the mortgage - I should theoretically be paying my mortgage by normal payment + 5.3% (the savings rate) per year. Whereas with the "reduced debt" option - I'm merely not paying any interest on the mortgage; but my mortgage remains the same minus my normal payment.

It seems insanely obvious that I should switch to "shorter term", but can someone confirm that I have my logic right?

For reference - IF describe the two options thus:

Shorter Term
When you offset you reduce the amount of interest paid over the term of your mortgage, which in turn reduces the balance of your mortgage faster and could result in your mortgage being paid off early.
Here's how it works:

• As the money in your savings and/or current account offsets against your mortgage, you earn no interest on that money, but pay less interest on your mortgage
• Your monthly payments do not change as a result of offsetting so you're effectively overpaying each month
• The mortgage balance reduces faster which means that you could pay off your mortgage early.

Reduced Debt
This payment option enables you to reduce the amount of interest paid during the term of your mortgage and reduce your mortgage balance over your chosen term.
Here's how it works:

• As the money in your savings and / or current account offsets against your mortgage, you earn no interest on that money but pay less interest on your mortgage
• Your monthly payments do not change as a result of offsetting, so effectively you're overpaying each month until a recalculation* is required
• Each time a recalculation* occurs, your regular mortgage payments are adjusted based on your reduced balance and spread out over the remaining mortgage term.

* Examples of a recalculation include interest rate changes, changing from interest-only to repayment mortgage, taking a payment holiday, etc.

Thanks in advance.

jauntyangle

Is there a set amount of time you should wait before bumping a thread?

UK007BullDog

Well.....

If I were you I would pay off the mortgage the minute its level to be paid off.

Then I would start savings as the rates are better out there than what IF can give you currently.

I would go for the shorter term. You will probably save more interest doing that. Just think of all the years you do not have to pay interest AND the capital you could save or invest into other ventures.

But in the end only you can decide.

jamesd

If you want the mortgage paid off as quickly as possible use the shorter term option.

Do remember that ISA allowances are a use it or lose it affair but once used last until you die or take the money out, a longer term than just a mortgage. Looks as though you should be looking to use the maximum 7000 a year ahead of any mortgage payments.

If your savings are in an IF cash ISA you can probably get a better interest rate than your mortgage rate somewhere else.

jauntyangle

Thanks guys

I'm not keen on paying off the entire mortgage immediately, as I would like the flexibility of being able to use the cash for other things; and my ISA is maxed out with another provider.

I'm really just trying to work out the implication of those two options given a 90-100% offset - does the "shorter term" mean that I would be reducing the mortgage faster than the "reduced debt" option - or do they have the same net effect.

Is there any reason at all why I should be continuing with the "reduced debt" option?

jamesd

Personally I'd go with the reduced debt option just because that gives you more flexibility to decide how much to overpay. No reason to reduce the term when you can do that voluntarily yourself anyway just by setting the payments to the same amount.

Reducing the term makes sense for people whose mortgages don't allow overpayments as large as those they want to make. It's effectively a dodge to let them overpay more.

Wii_Gadget

By using the reduced debt option, your monthly payment would be recalculated periodically. As you'd be offsetting the majority of your capital with the savings, this will, ultimately mean that your payments would gradually reduce on each re-calculation. Even so, majority of each payment you make would effectively be treated as overpaying capital.

Reduced term offers the same functionality as reduced debt, without the periodic re-calculation, therefore meaning that over time, this would give you higher overpayments when compared to the Reduced Debt option.

There's very little between the 2 options in your case...both result in regular overpayments. It really comes down to what your objectives are. If it is to continue to repay the mortgage as quickly as possible whilst retaining your capital in the savings jar, and you are happy with the current monthly payment, then reduced term ticks all the boxes.

Taking JamesD's post a stage further, it may have been better to use a mortgage that allowed overpayments to be made to reduce the balance immediately, with a facility to borrow back the overpayment at any time (giving you access to the capital). Bank Of Scotlands Personal Choice Mortgage has this facility. Your monthly payment would be negligible, and the difference could be invested using ISA's to give higher, tax efficient returns.

Bernie

jauntyangle wrote: »

Thanks guys

I'm not keen on paying off the entire mortgage immediately, as I would like the flexibility of being able to use the cash for other things; and my ISA is maxed out with another provider.

I'm really just trying to work out the implication of those two options given a 90-100% offset - does the "shorter term" mean that I would be reducing the mortgage faster than the "reduced debt" option - or do they have the same net effect.

Is there any reason at all why I should be continuing with the "reduced debt" option?

JA,

A lad after my own heart! We are almost in the same happy position as yourself and fully relate to your first para above.

We still have one large ISA (the result of an ISA/TOISA combo) stuck in the offset while we build up alternative cash to replace it. We are building the cash within IF because the surplus generates interest in the ISA rather than in the IF deposit or current accounts.

We have just gone to the reduced payment option. Since we are fully offset (with the ISA still included) and pay no interest, we are only going to deposit money into IF while we have to build up the cash sums there to "spring" the remaining ISA from the offset.

Once we've got this ISA out to a better home, we've decided we're not bothered about finishing the mortgage early and will let it run to term on automatic, drawing down on the deposit account slowly but still giving us the option to call on the cash should we need/want to.

Using the reduced payments option, we will see the repayment amount fall each month (because interest is factored into their calculations but there is none to pay). We will enjoy the difference as additional disposable income - or put it somewhere else.

I'm not a financial guru but we feel extremely comfortable with the way things are working out for us...

:beer: