Offset or PayOff?

peldpeld

Our low rate fixed term mortgage deal ends in January.

We are in the fortunate position to have savings & investments equivalent to the outstanding balance, BUT these were largely earmarked for a few years time when the kids may go to private school (probably need to draw them down in about 5 years).

I was thinking of doing an offset mortgage where I completely offset, then withdraw the monthly payment from savings to invest elsewhere. Then in 5 years i can easily access the lump sum.

The other option is we pay off the mortgage now, save every month, but then in five years take out a small new mortgage (when rate are hopefully lower). 

Obviously the net result is fairly similar, but i'm thinking Option 2 is easier given i may need to renew the rate in 5 years anyway, and circumstance may improve so i might be able to stretch longer (and if the kids decide they don't want to go to private school its already paid off) 

Anybody been in a similar position before? Any thoughts, comments or strong opinions on  Option 1 v 2? 

grumbler

I'm no expert, but for 5 years I see 4.4% fixed rate mortgages and 5% fixed rate savings. Ignoring 'product fees' and less flexibility, this looks better than an offset mortgage.

peldpeld

grumbler said:

I'm no expert, but for 5 years I see 4.4% fixed rate mortgages and 5% fixed rate savings. Ignoring 'product fees' and less flexibility, this looks better than an offset mortgage.

where are you seeing 5% fixed savings for five years? i dont think it can be arbitraged, as that'd be ideal (but not sure im comfortable putting £200k in a single building society) And you cant ignore product fees when they are a grand.

grumbler

https://moneyfactscompare.co.uk/savings-accounts/5-year-fixed-rate-bonds/
And are there no fees for an offset mortgage?

MWT

peldpeld said:

Anybody been in a similar position before? Any thoughts, comments or strong opinions on  Option 1 v 2? 

We had a similar decision to make some years ago with the same motivations, private school, University etc.

At the time we opted for the 'Offset' route and had many reasons to be very happy with that choice over the duration of the mortgage, as access to an instant line of credit provided considerable flexibility.

The key difference though is that we were doing it as interest rates were falling and heading into the long period of relative stability at those low rates, and in that climate returns on savings were negligible. 

Right now in the current market I'd be tempted by option 2, but I'd probably still go for option 1 as it preserves all the flexibility and certainty of access to funds whenever you want and still provided the safety net of the savings/investments if anything unexpected occurs, especially if the unexpected impacted on your ability to get a new mortgage...