Am I doing the right thing? Offset mortgage.

stellabgh

Hi

I'm new to these forums but am finding it very interesting reading.
We're about to renew our mortgage as we are coming to the end of a fixed term deal. I am with First Direct and am hoping to get their 5.29% 5yr fixed rate deal, Offset. We are happy to pay a little more fir a 5 yr fixed rate as we prefer to know where we stand than have fluctuating payments.
We have about 10k in savings which will be offset, and we wouldn't pay that in to a standard type of mortgage. Our incomings are about 4k a month, almost all of it goes out by the end of the month although we are hoping to save about £200+ per month as my income is going up a bit and we are doing some budgeting on other things.

Is an offset a good idea?

Thanks

Stella

Nala

Hi Stella

Am no expert by any stretch of the imagination but just wanted to give you my viewpoint. In my opinion an offset mortgage is a great idea and can work.

The First Direct one looks much like the Virgin One offset that we used to have: you run your current account alongside the mortgage, but correct me if I'm wrong.

We literally just had the one account - no separate savings account - and viewed it as a big overdraft.

As long as you are sure that for the majority of months you will be leaving extra in the account I really don't see how it can't work.

But.....do ask yourself if you are disciplined enough not to keep drawing against the overpayments. I believe it will only work if extra is left in!

I found I became very obssessed with it and ran a very tight ship because I needed the 'overdraft' to be smaller each month. It worked for us. Hope it does for you to.

Lunar_Eclipse

stellabgh wrote: »

Hi

I'm new to these forums but am finding it very interesting reading.
Is an offset a good idea?

Well, we have one and think it's the best financial thing we've ever done.

We've had it for a few years, had minimal savings to offset at the time (<your 10k) and had no money left for 'savings' at the end of the month.

Hence whilst I was taken with the concept a long time ago, since Virgin first launched it's One Account, it didn't seem to make much sense for us in reality. However, fast forward those few years and we have paid off tens of thousands. Fantastic. Which is why we're trying to pay off the mortgage as quickly as we can since I'm convinced the govt will intervene at some point.

Spendless

The first Direct offset doesn't show your mortgage etc as 1 big overdraft though it does work that way. You still see seperate amounts for your mortgage and any other accounts you have. Not sure if I'm making any sense here-lol

. We have had ours with FD for past year on a 7year fixed rate at 5.39.

ailuro2

Hmmm....

most mortgages allow you to pay off 10% of the outstanding balance in any one year without penalty.

How much of an impact is this 'possible' 200 per month going to make in percentage terms?

If you put your 10K in ISAs you can make 6% or more tax free, which is more cost effective than offsetting.

If you can get a lower interest rate on an ordinary mortgage and don't plan to pay ore than 10% of the balance in a year that's more cost effective too.

I'm a big fan of overpaying mortgages , but I don't like to overpay interest rates where the conditions aren't right for it, iyswim.

Hope this helps rather than confuses.:D

Nala

Spendless wrote: »

The first Direct offset doesn't show your mortgage etc as 1 big overdraft though it does work that way. You still see seperate amounts for your mortgage and any other accounts you have. Not sure if I'm making any sense here-lol

. We have had ours with FD for past year on a 7year fixed rate at 5.39.

I see - so your accounts still run alongside.

ailuro - I get your point. Stella really does need to work out if she will DEFINITELY have an extra £200 left every month. For us thought I found it worked because:

a) we left any monies not spent in the account
b) arranged for direct debits/standing orders to leave our account as late as possible after our salaries went in. Hence, interest being charged daily, we were in effect leaving extra in for the majority of days

I know it won't work for everyone but it did for us and we are mortgage free. We've always been desperate to clear a mortgage when we've had one and the offset account was a great vehicle for us.

getmore4less

You don't say how big the loan is, long term choping and changing has impact from the fees so once below around £100k(ball park) a long term deal at a good rate(the FD is OK) saves a lot of hastle every few years, for bigger loans the interest rate becomes more critical than the fees allthough these seem to be getting bigger.

I would have a good look at your outgoings and see what you can do to reduce those, time spent on that will return more than trying to scrape .01% off the mortgage rate look at every spend and do a proper budget in detail for at least the next 12months and project forward for around 10 to factor in things like car replacements.

A target spend for a couple is £1kpm+mortgage/rent that should free up some spare cash. look at things like cars,mobiles,TV,utilities, and groceries, these can be big drains for little value.

The one issue with offsets is you need to be good with money and build up that overpayment pot, seeing it there can lead to temptation so you need a good budget and stick to it.

A budget is the plan on what you spend/save long term down to the last penny a lot of people don't do this, but think they budget.

Don't foreget you should also consider not just, paying of the mortgage it is only part of a financials, retirement income should be part of the long term plan.

AdrianHi

Investments like ISA's are intended for the medium to long term where you should be able to get a better rate of return than offsetting on the mortage interest rate so long as you pick your time to take the money out carefully. In the few / 5 years of the mortgage look at what is going on with the stock market and make your best judgement on when to pull money out of the ISA to clear the mortgage. You don't have to pull it all out at once.
This is a bit more risky than offsetting the £10K, it all depends on your attitude to risk and how long is left before the mortgage is paid off.
Even if you stick say £7200 or your £10K or even all of it using both your ISA allowances into an ISA I still think that first direct fixed rate offset mortgage is worth doing as you can offset the remaining balance left of your £4K income over the course of the month and offset that £200 a month left over until you need to spend it.
Looking forward to getting my offset mortgage up and running, should be going with it in the next week or two.

stellabgh

Thanks all, will take into account all your comments. I'm going to crunch some numbers to check, but I don't think I can get a lower rate anywhere else which is fixed for so long.

Thanks

Stella

gallygirl

Well done Stella, that's a great 5 yr deal IMO.

Remember when crunching numbers that you'll pay tax on interest received so, if you are basic rate tax payers, you need to receive 6.6% to make it worth your while - doable, especially if you do one of the savings accounts linked to a current account.

The exception obviously is cash ISAs, so I'd concentrate on filling those each year 1st, in a fixed rate for a year as rates are likely to fall, then look at the numbers elsewhere.

formerchamp

Hi Stellabgh

no expert but just thought you would be interested in a little more feedback from someone who has been running an "open plan" mortgage with the woolwich for a couple of years. It's great, no really it is.

I also do most of my banking with Barclays, when I am online I can see all of my accounts, for me the mortgage is just a HUGE overdraft but the great thing is because the interest is calculated daily you know the amount is going down all the time. Not only does my current account balance count but also our joint account, OH single account and joint savings are in there too. This means most of our money is effectively earning a great interest rate and it's tax free because whatever our mortgage rate is we effectively get on our savings.

It has an added effect too, I call it the OH effect. My OH thinks god pays our bills, the regular question of "have we paid ...?" drives me nuts since he wouldn't know how to set up a DD to save his life, but he does like seeing the mortgage going down, he loves the letter we get every month saying you saved £x amount in interest this month and £y so far keep this up and you will repay in z numbers of years. He has become the new messiah of saving money and keeping moeny in our account as long as poss'. He pays for everything on his cc now and pays it off once a month just because he gets the interest against our mortgage for those extra days.

Enough, sorry to witter on, bye and good luck.