Use savings for deposit or overpayment

saajan_12

TBH I think you're overthinking.. The overpayment limit being 2.5k less by adding 25k to the balance is unlikely to make much difference compared to all the other variables - eg how much you'll want to overpay, the rates forecast, etc. 

If you're worried why not get the smallest mortgage now but with a shorter fixed term eg 2/3 years. Then after the 2/3 years, you can repay whatever you like and get a new mortgage for the balance you need at the time. 

redundantmortgage

I overthink everything which is half my trouble.

I've done some number crunching:

Option 1: Take out £250k mortgage at 5% over 25 years, overpay by £25k on day 1 and then overpay by £25k on day 1 every year until the mortgage is paid off

Option 2: Take out £225k mortgage at 5% over 25 years, overpay by £1875 (i.e. £22.5k/12) on day 1 of each month until the mortgage is paid off

Standard monthly payments would be £1461 for option 1 and £1315 for option 2. In terms of money paid overall option 1 would be less but only by £112. 

That's hardly anything really and given there's other factors at play here it could easily go the other way. The reason we want to take out 25 years is to minimise how much we have to pay each month in case I find myself unemployed. Option 2 seems more logical on that basis.

Does this look right or am I missing something?

I once calculated that renting and saving a deposit was more cost effective due to the mortgage interest, but then property prices shot up, rent went up and interest rates plummeted which resulted in us being considerably worse off.

BarelySentientAI

redundantmortgage said:

Option 1: Take out £250k mortgage at 5% over 25 years, overpay by £25k on day 1 and then overpay by £25k on day 1 every year until the mortgage is paid off

That's effectively the same as taking a £225k mortgage, except you would have worse LTV, and most lenders wouldn't let you overpay by £25k every year.

Hoenir

redundantmortgage said:

OK I see the down side is the interest rate tends to be higher and you get not interest on your savings.

The facility needs to be paid for. The money held in the offset earns the same rate as thato the mortgage and is untaxed. The monthly interest earnt reduces the mortgage capital balance outstanding. 

They work some people and not for others. Usefull if you have a tax bill to pay twice a year and simply wish to temporaily park large sums of money. 

SarahB16

redundantmortgage said:

I overthink everything which is half my trouble.

I've done some number crunching:

Option 1: Take out £250k mortgage at 5% over 25 years, overpay by £25k on day 1 and then overpay by £25k on day 1 every year until the mortgage is paid off

Option 2: Take out £225k mortgage at 5% over 25 years, overpay by £1875 (i.e. £22.5k/12) on day 1 of each month until the mortgage is paid off

Standard monthly payments would be £1461 for option 1 and £1315 for option 2. In terms of money paid overall option 1 would be less but only by £112. 

That's hardly anything really and given there's other factors at play here it could easily go the other way. The reason we want to take out 25 years is to minimise how much we have to pay each month in case I find myself unemployed. Option 2 seems more logical on that basis.

Does this look right or am I missing something?

I once calculated that renting and saving a deposit was more cost effective due to the mortgage interest, but then property prices shot up, rent went up and interest rates plummeted which resulted in us being considerably worse off.

I had/have an offset mortgage (my mortgage is paid off but I have kept the facility open as it gives me access to my mortgage facility if I need it and it isn't costing me a penny.)  I now use it as a current account (knowing it has this 'overdraft' facility if I should need it). 

Personally I think you should go with an offset mortgage and have the term to the maximum (i.e. perhaps up to your age of 68 or longer). 

Request a facility of £300k and then put your £100k of savings into the offset account and the interest you will be charged is on your daily balance, i.e. £200k/yearly interest rate/365 days (well that is how mine was calculated).  Do not think of it as really long mortgage (i.e. up to the age of 68 years as that is irrelevant as you are charged on your daily balance).  

Let's say you're not made redundant you could keep overpaying/put your savings into the offset account and this will reduce the interest you are charged as your balance would be lower.

I think for people who mainly rely on the income of one person to pay off a mortgage offset mortgages are excellent.  Yes, they may have a slightly higher interest rate but if you can access the overpayments it really does give you the peace of mind to know if you are made redundant you can access those overpayments and you would also be ahead on the mortgage payments too.  

I should add the information I refer to above is based on my offset mortgage taken out over 20 years ago so the offset mortgages that are currently available may differ to what I described above so always best to check with the offset mortgage provider.  

redundantmortgage

Our LTV will be below 60% whatever option we choose and it's not unusual to be able to overpay by 10% of original loan. Our old mortgage allowed that.

How do offset mortgages work regarding how much is protected?

Our savings are spread around because only £85k is protected at a single bank.

Schwarzwald

saajan_12 said:

Keep a small emergency fund aside ...

Small and large are all relative to income and fixed outgoings.

Three to six months I understand is a good rule of thumb.
some say of fixed outgoings, others say of gross/net salary.

if you were made redundant and struggled to find a job before, i would personally always kepp 6 months of at least net salary in an easy access emergency fund, ie if your net household income is £4k, approx £24k.

SarahB16

redundantmortgage said:

Our LTV will be below 60% whatever option we choose and it's not unusual to be able to overpay by 10% of original loan. Our old mortgage allowed that.

How do offset mortgages work regarding how much is protected?

Our savings are spread around because only £85k is protected at a single bank.

When you have an offset mortgage you no longer have any savings as they are used to reduce the mortgage balance.  In your situation you would not have £100k of savings and a £300k mortgage but a net mortgage balance of £200k so there is not £100k of savings to worry about being protected at a single bank.

Can you see how it would be a negative/mortgage balance of £200k (and would therefore only pay mortgage interest on the £200k).  

BarelySentientAI

SarahB16 said:

redundantmortgage said:

Our LTV will be below 60% whatever option we choose and it's not unusual to be able to overpay by 10% of original loan. Our old mortgage allowed that.

How do offset mortgages work regarding how much is protected?

Our savings are spread around because only £85k is protected at a single bank.

When you have an offset mortgage you no longer have any savings as they are used to reduce the mortgage balance.  In your situation you would not have £100k of savings and a £300k mortgage but a net mortgage balance of £200k so there is not £100k of savings to worry about being protected at a single bank.

Can you see how it would be a negative/mortgage balance of £200k (and would therefore only pay mortgage interest on the £200k).  

I'm not sure that's correct.  Whilst that is the effect in terms of interest, I'm not sure that it would be treated as zero savings balance in terms of FSCS protection.

Do you have anything to back up your very strong position?

SarahB16

BarelySentientAI said:

SarahB16 said:

redundantmortgage said:

Our LTV will be below 60% whatever option we choose and it's not unusual to be able to overpay by 10% of original loan. Our old mortgage allowed that.

How do offset mortgages work regarding how much is protected?

Our savings are spread around because only £85k is protected at a single bank.

When you have an offset mortgage you no longer have any savings as they are used to reduce the mortgage balance.  In your situation you would not have £100k of savings and a £300k mortgage but a net mortgage balance of £200k so there is not £100k of savings to worry about being protected at a single bank.

Can you see how it would be a negative/mortgage balance of £200k (and would therefore only pay mortgage interest on the £200k).  

I'm not sure that's correct.  Whilst that is the effect in terms of interest, I'm not sure that it would be treated as zero savings balance in terms of FSCS protection.

Do you have anything to back up your very strong position?

As I mentioned earlier I am only referring to how my offset mortgage works and yes that is exactly how it works there is no question about it. 

I effectively had a large overdraft (mortgage facility) over the years until it reached nil as month by month my outgoings were less than my income. 

More recently (last few years or so) it has been in surplus and then I accumulated quite a bit of money in my account (I know I should have put the savings to better use but let's leave that to one side) and received numerous letters only then from my mortgage provider informing me of the £85k limit being protected.  I have since put my savings to better use so my balance in my mortgage account is relatively low (in credit) earning (not paying) interest and I use this now as a current account. 

Different offset mortgages could work differently to mine but by means of a simple example and to help the OP:

£300,000 (mortgage facility required to purchase say a £500,000 home)

£100,000 (previously held in a savings account)

£2,000  (current account balance) 

Successfully obtain a £300,000 mortgage facility and the new balance is:

£198,000 (negative) but you have the ability to draw £102,000 (up to your £300,000 facility) but you no longer have any savings and you could say you have an overdrawn current account balance of £198,000.

Like I said this is exactly how my offset account works but as to whether you can still get this type of offset mortgage account nowadays I don't know. 

Other offset accounts may very well work differently to mine and may offer FSCS protection but I did not need FSCS protection until I had paid off my mortgage and built up surplus funds.