Considering an offset

quantic

Hi everyone, our mortgage term ends in the middle of next year and we are toying with the idea of going for an offset mortgage this time. We currently have 18 years left on our mortgage, by my calculations if we put the £50k we now have saved into an offset mortgage I can bring the term down to around 8 years while still maintaining the same monthly payment.

Seems straight forward, is there anything else I need to consider before doing this? We are getting terrible interest on our money currently, around £60 per month max.

AnotherJoe

You'd need to state what interest rate the offset would be, and what rate your savings are at, and the size of your current mortgage.

Can I presume the reason for thinking of an offset is you'd like the security of the £50k savings?

Because there's another possibility, which is a lower rate than an offset mortgage (non offset) and paying off some of the mortage with some of the £50k, and then building your savings back up again.

quantic

Yeah the mortgage rate would be slightly higher than the savings, with - as you mentioned - the added benefit of being about to tap back into those savings should we need to in a worse case scenario.

I had contemplated paying it all of the mortgage now and keep a little bit - say 40k and keep 10k in the offset incase we need it but I'm struggling to see a benefit of paying it off vs offset right now. Although it would be nice to see the mortgage outstanding figure go down by almost half.

The other thing I can't decide is to reduce the term or the monthly payment. I want to just reduce to a 8 year mortgage, keeping roughly the same monthly payment but if we needed to take the money out for whatever reason this would be pretty risky as the new payment would skyrocket.

getmore4less

Many see the 8 years but forget that that also means using the savings at that point.

All that an offset does if give you access to the money you would use as an overpayment.

eg

£100k 3% £600pm

paid off in 216m (18y) £29,521 interest.

Overpay £50k
£50k 3% £600pm

paid off in 94m ( 7y 10m) £6,138 interest.

£100k, £50k offset paying £600pm

100% offset in 7y 10m £6,138 interest

if you want to keep the £50k savings

paid off in another 83m (7y 11m) £0 interest

total 15y 9m saving 2y 3m on term and £23k of interest

quantic

Thanks for the calculations!

Yeah - we have no need for the savings other than as an emergency pot. I'm thinking our best approach is to maybe pay £40/45k off the mortgage and keep 5/10k in offset or in regular savings. Seems like a happy medium.

We have had too much money in low interest accounts for too long of a period now. Need to put it to better use.

getmore4less

If going offset there is no point in paying off more thna you need to to get a better LTV.

if another investment opportunity comes up that gives a better return that the reduced debt you increase it again.


Don't fall into the effective interest rate nonsense you may read about.

An offset is just borrowing less money.

quantic

Its very unlikely I would want to invest the money in anything that has the potential to lose money. Which only leaves extremely low return investments so its looking like offset is the best place to have my money.

My goal is to pay my mortgage off by the time I'm 40. (9 years time). Just trying to work out the best approach to do so.

AnotherJoe

quantic wrote: »

The other thing I can't decide is to reduce the term or the monthly payment. I want to just reduce to a 8 year mortgage, keeping roughly the same monthly payment but if we needed to take the money out for whatever reason this would be pretty risky as the new payment would skyrocket.

As long as you can overpay without penalty (or at least overpay the amount you'd like to overpay) the difference is purely flexibility. If you reduce the term you are contractually bound to make those payments. If you keep the term long but overpay as if you were on a short term, if something happens, let's say redundancy, you can drop to the minimum payment without any issue.

The only real negative is that you might be tempted to splash the difference on something trivial, however if you've accumulated £50k savings that's probably not going to happen.

Since all or nothing are rarely the only two or best options, why don't you use half your savings to reduce the mortage and then go from there. If it was me I'd take the longer term and overpay for flexibility.

The other thing to consider is your pension. If you are a high tax rate payer the returns on that are huge compared to anything else.

quantic

Yeah I think you're probably right. I think I'll use a chunk of savings to reduce the mortgage. Offset the rest and then keep a longer term and get them to set up a higher monthly payment from day one which would be the same as an 8 year term, with the added security of being able to change this if I needed to.

As for pension, I am currently paying into a very healthy public sector pension. While I would of course like more money later on when I retire I am quite happy with what I will already get given my contributions. I may look into this at a later stage though.

Perelandra

One thing to bear in mind is that you often have to pay a higher rate for an offset mortgage, so the additional flexibility is paid for through a higher interest rate.

It may be worth asking your lender if you can have two mortages- an offset and a regular repayment mortgage (fixed or tracker). My lender (First Direct) allowed me to do this, enabling me to get the best of both worlds.