overpaying v offsetting

magicdogsbrain

(I posted this on the mormal mortgage thread but im not sure its the best place for it)

I want to try and explain why, in certain circumstances, I think it’s better to not pay off your mortgage.

The part of the forum I have read so far seem to like the idea of paying off your mortgage – so if I offend anyone then I apologise in advance – here goes...
My circumstances are as follows: -

1) I am late 30s and have young family ( 2, 5 and 14)

2) I have a good (BOE +0.44 for term - 2035) offset CAM

3) I live in my first house and want to trade up in 5 or 6 years before my younger 2 go to secondary school.

4) There is a credit crunch and my mortgage provider is offering the same mortgage now for BOE + 1.69!

5) My current house is worth about 200k and I want to upgrade to about 300k.

6) My current Mortgage is 150k but I have about 30k offset and 20k stooze (I’m not greedy J)

I have 2 options: -

1) Pay off as much as possible of my current mortgage and remortgage in 6 years and use equity for new house.

2) Offset as much as possible and use the offset and equity to purchase new house (the current mortgage is portable).

If I go for option 1, I cannot guarantee that I can get a good mortgage deal – I don’t like the idea of BOE + 1.69!

If I go for option 2, I get to keep my current deal for 21 years after I move and can always remortgage if better deals start to come through (yeah right!)

guidance/suggestions/brickbats will be greatly appreciated

laurar3

Your mortgage is the same as mine (I sold mine to myself as I am a manager of the b soc that i think yours is with) if you definately are going to move in a few years time I would say keep the mortgage with the monies available as the mortgage is portable how current things stand you can borrow as extra without paying any fees etc ( no val or reservation) as existing customer. the only other option that you have as there are no redemption penalties is to overpay (not as lump sum) and then use it back as a payment holiday then you are getting it back at what the current rate is. Makes no difference really will just show on your quartely offset statement you have paid more off.

magicdogsbrain

Thanks for the info.

StuartGMC

I guess the only issue you need to really consider is the £35k limit on funds in the event that the lender hits difficulties; otherwise offset as much as possible and maintain repayments so they become overpayment.

Wish we could have overpaid more in mid-1990s but interest rates then were much closer to the previous 20yr average (around 13%) at 8-9% and we had taken on a mortgage knowing we could stretch to 13%.... yes, it was a different world of repossessions, job cuts, salary freeze or cuts; mmm, actually maybe some deja vu about this?

Seriously though, you recognise with the family the need to provide as much assurance as possible of not losing the roof over your head. Minimising the loan or at least offsetting as much as is viable whilst still enjoying fun with the kids as they grow is the best way to secure this.

Also, even if your house falls by 15%, that you want to buy will do likewise reducing the differential and hence still in your favour particularly with the comfort of the long term low rate.

Good luck with the plans

magicdogsbrain

Thanks.

One thing to mention - the 35K limit. I think that has been cleared up now - if you have debt it is offset agains any savings you have with the institution - so in fact if you have a even a normal mortgage - its a good idea to have your savings with them also!

http://www.moneysavingexpert.com/savings/safe-savings

magicdogsbrain

From the weekly email.

http://www.moneysavingexpert.com/tips/30-04-2008/

Correction. Are your savings safe? Debts & Savings ARE fully set-off against each other
A fortnight ago, I provided confirmation from officials at the Financial Services Compensation Scheme (FSCS) about what would happen in the unlikely event a bank collapsed and you had both debts & savings with it. Yet the FSCS was wrong, and has now admitted the mistake. The correct explanation is if you have any savings these are subtracted from debts (e.g. mortgages, credit cards, loans). So if you had £200,000 debt and £150,000 savings, and the bank went bust you'd owe them £50,000. Before, we'd been told only the £35,000 of savings that were protected by the scheme would count, so you’d have owed £165,000. Full Article: Are Your Savings Safe?

setmefree2

Thanks for that magicdog - I didn't know that.:o

magicdogsbrain

There was a furore about it a couple of months ago and it was mentioned in Martins email. I went absolutely through the roof!

The correction seemed to be quite low key, at the bottom of the email (although with a big itle). It was a relief for me – and actually it’s quite good when you consider mortgage / debt as a whole – I think it will be a long time before I am up 35K!

Based on past experience ( Northern Rock ) it seems that the government wont let anything go bust anyway.

magicdogsbrain

There are only 2 disadvantages to offsetting v overpaying I can think of: -

1) You are tempted to spend it.
2) You are exposed to possible identity fraud.

Before the credit crunch – there wasn’t much difference between offsetting and overpaying – now that credit is more expensive – I believe the advantages of offsetting far outweigh overpaying.

I have made part of my loan interest only – and I pay the ‘repayments’ into my offset – why should you give it back to them if its not costing you anything – offset the repayments as well?

Nala

magicdogsbrain wrote: »

There are only 2 disadvantages to offsetting v overpaying I can think of: -

1) You are tempted to spend it.
2) You are exposed to possible identity fraud.

When we were signing up for our offset (the One account) our solicitor came up with ......

3) Do you trust your other half not to clear the account out as it gets closer to NIL.