Overpayment/offset mortgage advice please

MM2005

Hi

I have a mortgage of about £135,000. House is valued approx £200,000.

My mortgage is currently with Nationwide (actually split between 2 x 2 year trackers running out of sync due to a house move and already having a a tracker running at the time).

I have inherited approx. £40,000 and my original (uneducated fincially!) thought was to just pay it all of the mortgage, thus reducing the amount owed/interest paid etc.

However, I've started looking at maybe switching to an offset mortgage also. The idea is that we pay the mortgage off ASAP. Current monthly payments are circe £800 per month. We could currently afford to overpay by around £500 per month (which may increase over the years).

So, I guess I am really looking for your advice/thoughts on what the best options are.

Many thanks for your time.

DiggingOut

Wow, that's complicated. Lump sum, monthly overpayments, flexible vs. offset, etc.

Presumably you have penalties if you prepay the £40K on your existing mortgage. Also if you change to an offset right now.

So you've got a lot of factors to consider. Is it better to save the money right now until one of your trackers runs out? There is no way to know without specific numbers.

How long till your first tracker runs out, and how much do you owe on it? How long until the second runs out, and how much on it? What are the penalties for prepaying them before they run out?

If you went with an offset, what is the best rate you could get right now? It would have to make up for the cost of any penalties.

I would sit down with a spreadsheet and work out the exact cost of all the options. To do that, you have to have hard numbers -- exactly what rates are on offer for savings, discount mortgages that allow overpayments, etc.

MM2005

Thanks for the reply. OK, let's make things a bit easier. Forget about the trackers not running in parallel and buying these out etc. If I was in the same position (£40,000 savings), can input £500 per month on top of the monthly payment of £800 on a repayment mortgage but can change anytime without penalty... what are my best options? My priority being pay the mortgage off early.

Does that make it easire to specify options and what people would recommend?

Cheers
MM2005

martinpike

Are you a higher rate taxpayer? That is fundamental to whether offsetting is better for you.

Also, are you prepared to start stoozing?

You sound as if you're in a similar financial situation to myself, and I love my First Direct offset mortgage arrangements.

However, I want complete financial freedom. No tie-ins, no fixed rate deals, just standard variable rate, walk away if and when I want to.

If you're prepared to be tied in to something for a few years, or have fixed ideas about where interest rates are going, that can change things too.

MastG

hi,

I'm also with first direct and love the financial freedom

try first direct website and look(and play) at their mortgage calculator

link in the "how much will my monthly payments be?" section on this page:

fd mortgages

Joe_Bloggs

As far as I know you are allowed to overpay Nationwide £500 a month. In theory this could be £1000 as you have two mortgages with them.

Nationwide reduce the capital and recalculate interest within 1 working day.
What are the rates you are being charged by Nationwide to borrow this money. Are you a higher rate tax payer and have to pay 40% tax on savings interest in stead of 20% ? Could you put your 40K in a non/lower earning spouses account ? What else you could get for your savings is a major factor in determining whether an offset is worth the poorer mortgage rate they charge.

The more facts you supply the more people can think about your situation.
J_B.
Wow wos that diggingout ?!

MarkyMarkD

martinpike wrote:

Are you a higher rate taxpayer? That is fundamental to whether offsetting is better for you.

Also, are you prepared to start stoozing?

You sound as if you're in a similar financial situation to myself, and I love my First Direct offset mortgage arrangements.

However, I want complete financial freedom. No tie-ins, no fixed rate deals, just standard variable rate, walk away if and when I want to.

If you're prepared to be tied in to something for a few years, or have fixed ideas about where interest rates are going, that can change things too.

I don't agree that your tax status is the primary determinant of whether offset is worthwhile. The key determinant is whether you want the surplus money back again. If you don't need it, or forsee any requirement for it in the short/medium term, it will ALWAYS be cheaper to pay it off the mortgage than to set up an offset arrangement, because offsets always have unattractive interest rates.

Most lenders will recalculate the interest due if you make a substantial overpayment (say £500 per month or more).

Many lenders will let you over-pay, either up to £500 per month, up to 10% or 20% per annum, or without limit, even on their incentivised mortgage products.

I would only suggest going down the offset route if:

(a) you are a higher rate taxpayer and don't have a standard/lower/nil rate tax paying spouse; and
(b) you have substantial amounts of savings which you will spend all of in the short/medium term - if you will spend some of them, overpay the mortgage with the bit you won't ever need; if you MIGHT need money in the future, overpay the mortgage and take a further loan/drawdown when you need it.

There is an offset mortgage calculator on this site - use the search facility - and be realistic about the amount of savings you NEED to keep as savings - not just leaving them all as savings and offsetting them rather than planning properly.

All IMHO!

MM2005

Bloody hell! Thanks for the info. I am a higher rate tax payer - earning around £41,000 at the moment. Sorry, I'm totally unclued up on saving and how it affects your income regarding tax etc. - didn't realise being a higher rate tax payer made any difference! My wife earns around £20,000 p.a. We have a joint (cahoot) current/savings account. Do I need to declare the savings? I'm PAYE at the moment.

Interest rates (fyi) are as follows, split across the two 2 year trackers:
4.75% - £58,491
4.84% - £76,210

Cheers to Joe Bloggs too - never thought about possibly being ably to pay £1000 (£500 per mortgage) extra. Another consideration. Although my head may well be ready to explode by the time I finish here! :-)

Joe_Bloggs

@MM2005
You can't just fully repay/redeem your Nationwide mortgages without penalty.
they would charge you 2% as there are two years left on your trackers. That's £2694 down the drain + approx £300 in fees of old and new lender.
This is a deal breaker as it wrecks any benefits of what you could get elsewhere. If you have a better exit deal with Nationwide then there maybe complaints from Nationwide members about preferential treatment.

Do you have any savings that you could add to your 40K. The reason is that you are charged interest on (capital borrowed - savings in linked offset accounts). The more savings you can throw in the easier it is to make any financial sense.

The best offset rate I have found is a BoE 0.54% tracker from Intelligent Finance for three years. Thats initially 5.29% and then 5.95% on 1/10/2008. There are probably better deals elsewhere.

You and spouse can afford to have a tax free cash ISA each. This makes the offset case look even worse.

J_B.

MM2005

Cheers JB.

So, from what I can pick out from what you said - it looks like my best option at the moment is to stick what we can in a couple of ISA's. And overpay the maximum amount (probably £500) on each mortgage.

I can then look at it again when the first mortgage's 2 year tracker is up (next March).

Thanks
MM2005

Joe_Bloggs

@MM2005
I'm not sure how joint savings accounts are treated for taxation on interest when the parties involved have different tax rates. My guess is it won't be in your favour. If you put the savings in the lower rate tax payers name then you can avoid paying around £400 interest tax on the 40K per year. (Assuming 5% on savings and 20% and 40% tax on the interest).

Your only allowed to stuff £3000 per year each in seperate ISAs. You can build up funds over time. Martin has lots of savings advice in his articles on the left of this page.

There may be other wheezes out their such as savings for kids and even pensions for them. This is getting into investments and not savings.
J_B. (As far as I know, I'm not a financial advisor)

PS I've got two mortgages too. One of them is an IF. offset and the other a Nationwide tracker. I don't have the 40K however.