Is looking for an offset mortage or no fee early payment mortgage a bad idea?

chamberino

We are planning to buy with a budget of 450k and a deposit of 130k (so total mortgage of 320k). There are two factors I'm thinking about and when I initially saw offset mortgages it seemed ideal, but now I'm not sure as I've read they have high interest rates making it not worthwhile.
1. My dad is willing to lend me 100k to reduce the cost of the mortgage. This could be a loan? The offset seemed ideal as it would mean it could be returned to him if he needed it
2. I'm a contractor so I want to have a monthly payment that's affordable if I'm not working, but be able to pay in the extra cash if I have a surplus beyond day to day/emergency fund
These features don't seem to be very common, so now I'm wondering if there's better options to use this money for the mortgage.

Thrugelmir

There's generally a charge levied to cover the cost of providing the offset facility. This will be in the form a higher interest charge to comparable products. 

You would need to calculate whether your father lending you money is beneficial. Depends on the finer detail of what's planned.

Likewise with emergency funds. Is the amount to be held on deposit worth the additional levy. 

As interest rates have reached the floor. Then the actual saving has diminished. 

K_S

@chamberino Do keep in mind that if a family loan will form part of your deposit, the potential lender pool will shrink significantly.

getmore4less

Check what's on offer by lenders that do offsets to see the rate and fee margins. 

Then crunch some numbers. 
There is a long running offset thread with loads of info on how to do the calcs. 

With mortgage rates low and some reasonable savings options the financials can be close the real benefit being flexibility. 

chamberino

K_S said:

@chamberino Do keep in mind that if a family loan will form part of your deposit, the potential lender pool will shrink significantly.

I had read that but assumed it was down to the lender seeing that you hadn't saved the money yourself. Is that still the case if we already have 25% deposit and the parental loan/gift is on top of that?

chamberino

Thanks @getmore4less and @Thrugelmir - I guess there's no overall answer and I'll just have to find the products and put the numbers in.

K_S

chamberino said:

K_S said:

@chamberino Do keep in mind that if a family loan will form part of your deposit, the potential lender pool will shrink significantly.

I had read that but assumed it was down to the lender seeing that you hadn't saved the money yourself. Is that still the case if we already have 25% deposit and the parental loan/gift is on top of that?

Parental gift is fine (along with a letter confirming that it is indeed a gift), even if all your deposit is just that. Plenty of lenders will consider lending.

Any form of loan making up part of the deposit, including a loan from family is treated very differently.

I hope that makes sense.

Grumpy_chap

For the OP, is the £100k from the OP's Dad over-and-above the £130k deposit?  If so, it might be an option to take the mortgage ignoring the £100k (whether gift or loan) and then make a partial repayment into the mortgage account, particularly if the mortgage is one that allows over-payments to be drawn down again.

I have an off-set mortgage and find the flexibility very useful, particularly as income is variable (like the OP describes).  It does mean that I can not make a nett payment sometimes, but that does not record as a skipped payment, so good for the credit file.  Working out the costs is difficult, especially as we put all our savings in (so no tax on interest earned) and then draw back out, e.g. for car purchase.  Overall, I think the costs work favourably, partly because my interest rate is very competitive but also because savings are earning the borrowing rate plus I can borrow at mortgage rate for any purchases required.

The main thing with the offset mortgage is that there must be a strong discipline.  What the banks want you to do is see you can borrow back your mortgage and do so for a new car, or home improvements, or whatever.  I have set a discipline that, at the end of the year, the remaining mortgage balance must be lower than at the start of the year and monitor that target to ensure it is achieved.

Some of the offset products just work like one big account, which is always overdrawn - I would find that very depressing.  My offset mortgage (First Direct) allows current account and savings to be in separate accounts to the mortgage loan account.

MWT

Grumpy_chap said:

My offset mortgage (First Direct) allows current account and savings to be in separate accounts to the mortgage loan account.

The one we had from Woolwich/Barclays was like that as well, we could set up multiple savings 'pots' and decide if they were included in the offset or not.

Going for the Offset mortgage was easily the best financial decision we made, the flexibility was invaluable at various times during the 25 year period.

getmore4less

The great offset deals with lifetime trackers at <1% over base and as some <0.2% over base just dont exist anymore.

OP is 71% LTV converting some of the extra £100k into a gift to get a better LTV may be worth looking at.

Looking at  Barclays(offset I have) from their new data sheet 2Dec.
2y offset tracker 75% LTV  1.72%(base + 1.62%)  £1749 fee
2y tracker 1.72% £999 fee or 2.12% no fee 
extra £750 for the offset product 

2y fix 1.57% £999 fee
offset/tracker  is a  0.15% premium on rate.

Calculation for same fees  is in this post(and others)
https://forums.moneysavingexpert.com/discussion/comment/75335324/#Comment_75335324
M : mortgage debt
S : standard rate
O : offset rate

C : savings capital
N : net savings rate

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

there are extra fees so that does not work it gets a savings rate around 1.25%

Looking at 2years  £320k repayment over 25years same payment 
offset ( £99,250 after extra fee)

amount	rate	payment	owing
£320,000.00	1.57%	£1,313.14	£298,206
£220,750.00	1.72%	£1,313.14	£196,430

if you then take the £100k of the regular you have saved £1,776
£100k at savings rate of 0.89% over 2y will get you that

There are 2y fixed savings around that so the offset is fairly neutral with in a few £100.

For me that would be worth the flexibility.

MaxiRobriguez

I have an offset mortgage, but I use it as a place to store cash before it goes into investments, i.e, the intention is for the offset to be wound down over time, not added to. I'm nearly at the end of that process and will be shifting to a fixed rate, non-offset in April.

In terms of cost, my offset was roughly 0.4% more expensive that the alternative fixed rate deal, but will be higher with higher LTV's like yours, so you're talking an extra £1,500 in interest per year for you to go towards an offset, assuming like for like (ie not gifted the £100k).

If you're worried about the ability to repay consistently (and that's why you want the offset) it may make more sense to seek a smaller monthly payment and then make overpayments to compensate. This would essentially be doing the same thing as your offset plan, but on a cheaper rate. But it does depend on lenders willing to lend you even more than your plans above.