Offset Mortgage vs Overpayment

Glover1862

I'm thinking about two mortgages as follows:

1.65% variable for term £999.00 Fee
1.75% Offset variable for term £999.00 Fee

Mortgage balance is £146000, LTV 26%

Current savings £20000 and looking to overpay by £1000 per month.

Is there any benefit using over payments (apart from the slightly cheaper rate) if my aim is to repay the mortgage ASAP? If I use the offset account would the break-even point (when saving equal mortgage balance) be reached sooner or does it make hardly any difference? I would want to keep my savings as an emergency fund.

AnotherJoe

Glover1862 wrote: »

I'm thinking about two mortgages as follows:

1.65% variable for term £999.00 Fee
1.75% Offset variable for term £999.00 Fee

Mortgage balance is £146000, LTV 26%

Current savings £20000 and looking to overpay by £1000 per month.

Is there any benefit using over payments (apart from the slightly cheaper rate) if my aim is to repay the mortgage ASAP? If I use the offset account would the break-even point (when saving equal mortgage balance) be reached sooner or does it make hardly any difference? I would want to keep my savings as an emergency fund.

In which case go for the offset, overpaying but keeping your offset balance at whatever sum you want for emergencies. You'd still be getting an effective 1.65% on it (and tax free not that that may matter) which these days is a pretty good rate without having to do contortions across multiple small accounts.

getmore4less

All that is happening with an offset is you are borrowing less but the rest is at a higher rate.

there is no effective rate but if you insist on believing there is you have to account for the higher rate on the borrowings .

the break even offset amount when you have a savings rate is calculated using.

M : mortgage debt
S : standard rate
O : offset rate

C : savings capital
N : net savings rate

(M*S) - (C*N) == (M-C)*O

which simplified is

C(O-N) == M(O-S)
which become a simple ratio check of the mortgage-saving against the rate differential

C/M == (O-S)/(O-N)
for a 1% net savings rate
C= 146000 * 0.1/0.75 break even amount is £19467

If you don't have savings rate and want to know what you have to get you solve for the savings rate needed to make the offset worse off.

(O-N) = O - (O-S)/(C/M) = 1.75 - 0.1*146000/20000 = 1.02%


If you can get a savings rate better then 1.02% then offset is worse.

That a the closest to a real equivalent rate for those that like that number.

getmore4less

IF you need/want to keep the savings then the cost will depend on what savings rate you can get see above.

The closer you an get to the 1.65 the bigger the offset needed to break even.
the 0.1% premium on the rate is less than £150py that may be worth the convenience and flexibility of the offset product.

with overpayments the cost will drop very quickly.

whats the planed total payment per month?
it will be possible to work out the cost till paid/off/100% offset.

Glover1862

Thanks for the impressive detailed answer, my mortgage term is 18 years which I didn't mention and at a rate of 1.75% my repayments are £794, with the £1000 pm over payment it will be £1794 pm, the £999 fee would be added to the loan.

I've only just come into the £20k so it's getting virtually no interest sitting in a current account.


Using the following calculator:

http://www.ybs.co.uk/mortgages/tools/offset-calculator.html

I get the following:

You could pay off your mortgage in:

16 years 6 months

When a Reduced term option is taken and you still have all your Offset savings. Or, if you want, you could pay off your mortgage in 7 years 4 months using your accumulated savings of £88,000

This seems to be the same if I simply overpay and forget the offset.

getmore4less

offsetting(if done properly by the lender) is financially just the same as overpaying as long as you don't start spending the money.


Term only sets a payment this is what determines what a mortgage costs.

adding the fees paying £1794pm

base mortgage is £146999 @ 1.65% with £20k in the bank

takes 87months and £9070 of interest to pay it off (you still have the £20k and the interest from that.)

if you offset £20k you start at
£126999 @ 1.75% but no money in the bank

your offset will be paying zero interest at month 75, 6y 3months having paid £7143 in interest

11months later you will have a spare £20k in the bank gaining interest a touch earlier than the non offset.


That YBS calculator looks wrong.


The lower rate not having the savings would be paid off in 75months with £6710 interest lets call that £430 less

0.1% is a tiny margin on an offset so the features are well worth the extra costs of £430.

Glover1862

Thanks a lot of this info, you've answered my question in way more detail than I expected. You're right, as the difference in cost is so small I will apply this week for the offset. I was going to put it off as I have just under 4 months before my fix rate ends, however this product I'm applying for is valid for 4 months from the time of offer. I can't see the rate getting any lower, as its variable even if it does it will reduce so no need to wait.

I'm not surprised you mention the calculators are wrong as I'm getting conflicting results hence why I asked the question, your last certainly makes it clear.

getmore4less

I jut use a simple calculator and crunch the numbers not that hard once you realise you can ignore term if setting your own payments

http://www.whatsthecost.com/mortgage.aspx

...........
Once you have an offset if you can borrow money at a rate lower than the mortgage rate you can borrow an offset.

The simplest free money these days are the 0% purchase credit cards, just spend normally on them and offset the money, pay off the card just before the 0% runs out.