Offset Mortgage

mr_shinobi`

Hi All
I have been applying for an offset mortgage with a building society.  All went went well, until we reached the part where they advised me what the best product was for me.
I assumed that the lower rate product (with an arrangement fee) would be better than a higher rate product (without an arrangement fee).  The building society advised that it would be cheaper to go for the higher rate product - I'm very confused, and they can't seem to explain their rationale!  Here are the details:
1) Lower Rate: 1.99% fixed for five years + £1,000 arrangement fee + £700 valuation fee
2) Higher Rate: 2.29% fixed for five years + £700 valuation fee
I will borrow £700K, but have £300K in savings - which I will likely top up if I can save more.  I am most interested in cost over the five year fix period (i.e. which is the cheapest).  I see costs as total interest paid + fees.  I see paying down of principal (this is a repayment mortgage) as a good thing, not a cost.
Any ideas why they would be advising me that the Higher Rate product is cheaper over five years?
Thanks in advance for an insight!

K_S

@mr_shinobi Plug in the numbers here https://www.moneysavingexpert.com/mortgages/compare-mortgage-rates/ to compare the two products.

You can see which of the two comes out cheapest on a total cost plus balance outstanding at the end of the 5-year fix. I'm with you, with a 400-700k mortgage, very rough calcs (and making a few assumptions) indicate that the lower-rate fee option should be cheaper.

The building society advisor should be explaining their rationale to you, there must be something they are basing their recommendation off of.

getmore4less

The MSE calculation can get answers wrong.
( Not a big issue for large savings)

The very basic does it have a chance of being right is the interest only test.

rate difference X amount X years
0.003 X £400k X 5 = £6k

Repayment schedules reduce that saving but in the £100s not £1000s

The advisor need to show you why they think you can't save a £1k fee with a rate o.3% lower on 400k over 5 years.

getmore4less

here are some numbers based repayment/offsetting  options
for £400k  1.99% £1k V 2.29%
starting with the standard breakeven repayment size. based on term

term:	size needed
5	£207,953.95
10	£185,946.07
15	£179,625.51
20	£176,637.37
25	£174,902.80
30	£173,774.35
IO	£170,143.47

Even on the shortest term 5 years you have a bigger net mortgage at £400k.
on a 25years schedule

amount	rate	payment	owing
£401,000.00	1.99%	£1,752.46	£332,455.25
£400,000.00	2.29%	£1,752.46	£337,184.84

better off by £4.7k after 5 years

lets look at throwing £4k per month at the mortgage/offset roughly ~9y3m full term

amount	rate	payment	owing
£401,000.00	1.99%	£4,000.00	£190,789.01
£400,000.00	2.29%	£4,000.00	£194,452.79

at the end of the 5 years still better off by £3.6k 

£7k a month would have you close to fully offset at 5 years

amount	rate	payment	owing
£401,000.00	1.99%	£7,000.00	£1,694.14
£400,000.00	2.29%	£7,000.00	£3,935.29

Still £2.2k better off 

throw £10k  per month fully offset by 3y6m

amount	rate	payment	owing
£401,000.00	1.99%	£10,000.00	£5,292.58
£400,000.00	2.29%	£10,000.00	£6,477.65

still better off a touch over £1k better off 
its not till you get to around 21.44k per month thrown at it does the no fee rate work out better, 1y7m  to fully offset

amount	rate	payment	owing
£401,000.00	1.99%	£21,400.00	£1,099.29
£400,000.00	2.29%	£21,400.00	£1,095.69