Mortgage dilema - would love your opinions and help

getmore4less

This just some thinking.

The move here is quite important to getting this right, well optimum rather than wrong.

The key is you have a loan at base + 0.5% which is good so it may be prudent to try an preserve this(shame you paid off some if you are only going to borrow back at a higher rate hindsight is great).

Borrowings

£27500 @ base+0.5%(5.5%?) term 6.5y £415pm. PORTABLE.

Savings

ISA - £9, 800 AT 6.5%
HI-SAVE ACCOUNT - £4,000 AT 6.15%
Term deposit account - £7,000 at 7%
Instant access savings £3,000 at 5%

Spare cash

600pm.(lets assume this is every month). one thing asume there are two of you so you have ISA allowance of £7200py so it covers that.

House value

£140k might be moving £50k up market.

TAX rate assume low rate @20%. so to beet the 5.5 you need 6.875%



Lets start with a move, costs will be lets say £5.5k.(1% on £200k+ 2% on £140k + costs)

One senario you buy the new house and remortgage on the best deal(for you) looking at all lenders.

Or you port the current loan and top up with the best deal that Britannia have to offer. You can have two loans runing side by side from the same lender but I have never seen you be able to do this with an offset.

One thing I would think about is reverting the current deal to 25y and go interest only, to preserve this rate long term. any new money borrowed will be at a higher rat so needs to be paid off first.

Cost of this is 0.58%(mortgage-taxed savings) on any capital repayments but any new money you borrow(Britannia flex rate is Base+1.49%) if you move is likely to be much more expensive than this so a couple of years at this rate against the savings for the rest of the term should make this worth while. Down side is if you decide not to move you will have incured some costs.

You will need to project some numbers to see what the cost issues are but I think you will save by doing this unless you can find a good deal elsewhere.


Example with the move you have

£50k at base+1.49% repayment 25y £337.29
£27500 base+0.5% i/o 25y £126

So still within the amount you have and you can overpay, use a snowball calculator to see what sort of term you could manage based on what you could pay.

Offsets work but this good tracker rate means you are paying less than the money earns in a ISA so the ballance is probably best to keepit and ISA the money.
Once the mortgage is gone your savings rate is over ISA allowances so you need to use your allowance before you pay off the mortgage.

getmore4less

StuartGMC wrote: »

If you are looking at £80k for the mortgage, you can offset at £16k (20%) and still keep your ISAs growing. Is the present mortgage at BBR+0.5% better than, say 0.8 x 6.45% (i.e. 5.16%), I think you would be at 5.5% presently which would be more interest to pay intially?

This caculation is fails to take the opportunity losses of interest on the savings..

£80k mortgage £16k savings offset.

Mortgage rate is 6.45% savings rate is 6.15%(some it at 7%) taxed 20% so 4.92%.

So you don't save the full 6.45% on the £16k only 1.53%

So the equivilent rate on the £80k 5.466%

Say we go for keeping the £27.5k base+0.5 + top up loan of £52.5k 6.45% and savings £16k 4.82%.

£80k equvilent is 5.16%

reduce the loan by the £16k and it is now 4.83% £80k equivilant.

Are the benifits of offseting worth the extra cost? for some they will be.

natman

Thanks guys and in particular get more for less - that was a pretty intense appraisal of my situation -

I have pondered with extending my mortgage to 25 years, but never thought of intrest only, MAINLY REPAYMENT. my main thoughts were to save like mad and look at either a career break or using the savings as a deposit for a new home.
This was it was a win / win as i would be paying the minimum required at around £127 into the mortgage and saving £800 a month.
This 800 a month would be worth say £20,400 in two years. At this point I would have these options -

MOVE - and have new 20,400 + existing 24,000(estimate)=44,400 to reduce loan i would need for a new house. so instead of a mortgage for 80k in total it would be more like 55K.
Pay off mortgage completley - i would have left around 25,000 mortgae to pay off and have 44,400 to do it. If i paid it off i would have around 20k left.

GIVE UP WORK AND RETIRE - - - - - - - - HAAA HAAA AND TRAVEL THE WORLD.:rotfl:

StuartGMC

getmore4less wrote: »

This caculation is fails to take the opportunity losses of interest on the savings..
Are the benifits of offseting worth the extra cost? for some they will be.

Getmore4less, agreed, taking just the mortgage interest rate as I have done and not allowing for the savings interest lost as you indicate is an error, which of course is less for higher rate tax payers.

Of course, we haven't considered the current account running at say, average balance of £1000-1500 per month which offsets whereas it is unlikely to earn much interest by nature of required access. It seems to be one area overlooked in many calculations, but for the "latter stage" of repaying the average current account balance may be 3-10% of your remaining mortgage and can change the situation somewhat I think?

In the OP case if remaining as a basic rate tax payer and assuming that you can run the existing loan (at the BBR+0.5% for term) alongside a new one, then it changes the scenario due to this very good position vs those offered now. If however, you need to obtain a new mortgage where the existing good rate of BBR+0.5% we agree is unlikely to be available, then it's back to the straight offset argument I think as I don't think you can get a second loan as an offset?

Thanks for correcting this and if you would indulge me, can I just confirm correct numbers thus:
£80k with £16k offset; mortgage interest at 6.45% is £4128 (Eqv 5.16%)

[This could probably be improved if current account runs at avg £1.5k per month to give £4031.25 (Eqv 5.04%) as our baseline case for offset with CA included]

Basic rate tax:
£80k no offset at 6.45% is £5160
£16k savings earning at 6.15% (4.92% equivalent) is £787.20
Interest paid then is £5160-787.20 = £4372.80 (£244.80 worse off) (Eqv 5.47%)
[vs Current account offset this is £341.55 worse off]

Higher rate tax payer
£80k no offset at 6.45% is £5160
£16k savings earning at 6.15% (3.69% equivalent) is £590.40
Interest paid then is £5160-590.40 = £4569.60 (£441.60 worse off) (Eqv 5.71%)
[vs Current account offset this is £538.35 worse off]

So in order to improve on this situation, assuming savings rates are fixed and no influence of current account earning interest you would need the following to beat the 6.45% £16k offset on an £80k mortgage:
For Basic Rate, mortgage interest rate to give £4915.20 i.e. 6.14%
[or inc £1.5k Current account offsetting, £4818.45 i.e. 6.02%]

For Higher Rate, mortgage interest rate to give £4718.40 i.e. 5.90%
[or inc £1.5k Current account offsetting, £4621.65 i.e. 5.78%]

EDIT: In addition, having run the Egg mortgage calculator on our own situation it of course pays back early (3yrs 11mnths on a 8yr for me and saving £6037). So I only lose interest for 4yrs 1mnth; then with mortgage cleared can put it into a higher interest earning scenario to add to the benefit against the original term. mmmm - yet another variable to think about!

EDIT2: Finally, in terms of the long calcs above we need also to account for the fact that once the capital reaches close to £16k, then any offset above this will incur tax on interest paid. At this stage one then needs to move money out from offset to a better interest rate; this sum will likely be (part of) the 3-6month emergency funds so it'll need to be accessible. So at this point you will then have a mix of offset (savings & current account, above arguments apply) and additional savings each month (now netting income and growing as capital owed is reduced). Now that is going to be an interesting sheet to set up.... anyone done so already?

Thanks for making me think these through as it needs some planning in my case from late 2009.

I guess I'll now need to adjust my home spreadsheet to augment "Equivalent rate" with one to factor the interest lost on the savings but it leaves one wondering what rate to use. I wouldn't be holding my cash in the First Reserve at NatWest if I wanted to earn interest, so an interesting issue to address in a spreadsheet where I don't want to be looking up new rates weekly...