Intelligent Finance - Help!!

pokey128

Can someone please help me understand my IF offset mortgage!! I don't know if I am being stupid but I just can't figure it out!

With IF you can choose how you want your money to work for you- you can either choose to reduce the term of the loan, reduce the capital or have lower monthly payments. My partner seems to think that all three you will end up paying exactly the same amount over the long term but I just can't get my head around it. He has chosed lower monthly payments so that we have more cash available in our current accounts. I think that chosing to reduce the term of the loan is better for us cause it means that the mortgage will be paid off sooner - and therefore less interest to be charged?

Can one of you clever people out there please explain this to me???!!

Thanks in advance

xx

Welshlassie

You're right.

If you reduce the term of the loan then you have less time for them to charge you interest. If you pay less each month you're not paying off as much over the term.

pokey128

Thanks for that Welshlassie - I love it when I am right!!

Miss_Pink_3

Thats what Im doing with IF too. Reducing the term.

JonnyBravo

I reckon if you choose either the reduce capital or reduce term option you end up better off but in slightly different ways....
1)If you reduce the capital you will still stay paying for the original term but progressively smaller amounts (not as big a drop in payments as using the money to drop payments directly, the last option)
2)If you reduce the term you will of course continue to pay more but for a shorter period.


The bad option is the last ie using the money as a type of prepayment of your regular payment and therefore reducing your monthly payment. This really just means you continue as you were. Original term and the most interest.


If you think about it logically, anything that means you pay less now means you will pay more in the future. You don't get something from nothing!

pokey128

Thanks for the advice JonnyBravo, I just spoke to my OH about it and he still can't understand (or maybe its still me!) He thinks that if you have £10000 in savings and pay off £500 each month it would be exactly the same as if you had the same savings but paid of £1000. Basically that the interest charged is made up of the difference between your mortgage and your savings so that by paying less each month you have more savings and therefore easier access to money if you need it?

I'm still totally confused!

Welshlassie

You woudl be better of if you savings had a higher interest rate than your mortgage, but although these accounts are available, they are few and far between.

pokey128

With Tax implications there are no savings accounts (that I know off) that are better than putting it to the mortgage -my partner is a higher rate tax payer so it would have be near 10% to be worth while i think.

totally_confused_3

Hi, just came across this post and was wondering if someone could also help me get round these different mortgage payment options as I am also currently applying for an offset from IF.

We were originally in the process of applying for an offset from FirstDirect and as we understand, the interest charged on the mortgage is made up of the difference between your mortgage and your savings. So basically it doesn't matter if you pay more or less as if the amounts goes into savings, it still comes out to the same numbers?

So surely the same applies for IF except that they have 3 payment routes?

Or is it because IF is on a repayment only option and FirstDirect is on interest only? Does that make a difference then?

Welshlassie wrote: »

You woudl be better of if you savings had a higher interest rate than your mortgage, but although these accounts are available, they are few and far between.

And I really don't understand this poster's comments... can someone pls explain???

h4nym

Welshlassie wrote: »

You woudl be better of if you savings had a higher interest rate than your mortgage, but although these accounts are available, they are few and far between.

If you were able to get a savings rate higher than your mortgage rate then potentially you would earn more in interest on your savings than you would spend in interest on your mortgage. However, there aren't lots of those rates about, so it's unlikely.

The other thing you have to worry about is tax - Uncle Gordon taxes money you earn in interest on savings. He doesn't, however, tax interest you save when you pay down your debts. (I'm sure he'd love to, though, but we might notice so he can't!)

So - the real question is can you get a savings account that pays you more after tax than you're paying in mortgage interest.

Example:

Mortgage Interest Rate: 6.0%
Savings Interest Rate (net) : 6.5%

Put your money in the savings account and keep your mortgage as it is

Mortgage Interest Rate: 6.0%
Savings Interest Rate (net) : 5.5%

Put your money into the mortgage

Reality is that you're unlikely to get any more than 4.5% net of tax on your savings unless it's an ISA.

My wager, and Welshlassie's, is that you can't beat your mortgage interest rate with your savings net interest rate.

So you'd be better off paying down your mortgage.

Hope this helps

H

nrsql

If it's an ofset mortgage then the savings will be applied against the mortgage if kept in the offset account, which I guess is what yo9u mean by the current account. You are effectively getting the mortgage interest rate on savings tax free.
By not paying off the mortgage all you are doing is keeping those funds avaiolable for your use if you need them - there's no difference in the interest accrued.
You won't reduce the term of the mortgage but at some point the amount in the current account will be the same as the outstanding mortgage and you will be paying no interest.

But the interest rate you are getting probably means that it's not a good deal.