2 yr offset or 5/10 year repayment

cambs1999 · 13 February 2018 at 6:35PM

I post a thread yesterday about my mortgage and I'm still undecided.

I can have a 2 yr offset fixed rate at 1.84%
5 yr fixed rate at 1.94% or 10yr 2.49%

We have LTV of 25% and have 19 yrs left but hope to repay in around 10. We aren't intending to move. We save around £45 from offsetting but this money will be needed within 5 years or so.

If I give up our offset due to our income we won't be able to get another one - I love the offset but am worried in 2yrs we'll be left with higher interest rates.

I'm leaning towards the 10 yr fixed to ensure low rate for hopefully the rest of our term ( I am aware we can't repay the mortgage in full during the 10 yrs).

But then I think keep with the offset, save on the repayments now & see where we are in 2 yrs.

Any thoughts?

Tiglet2 · 14 February 2018 at 9:01AM

I can't advise you, but we recently had the same dilemma and after much research and a chat with a broker, we have just re-mortgaged to a 5 year fixed rate of 1.89% Offset mortgage with Coventry. Our broker's opinion was that Coventry are one of the few which still offer offset mortgages on a fixed rate. However, offset mortgages are only good for people who have savings or will regularly deposit sums to offset the interest charged. There was a £999 admin fee though.

cambs1999 · 14 February 2018 at 9:35AM

Thanks for replying - all helps in making a decision.

I've been trying to work out the numbers.

I'm thinking of sticking with my offset but at 2.29% rate fixed for two years as the lower rate of 1.84% has a fee of £725 which I can't make work for us - we would be very slightly worse off over the two years taking into account our savings.

I've worked out using mortgage term of 10 years.
2.49% for 10 years £876 total payment would be £105,120
1.94% for 5yrs X 2 £853 for 10 yr total payment would be £102,360
2.29% for 2yrs but by offsetting £28,000 would be paid off in 9 years would be £100,268? not sure this is correct.

The offset at 2.29% I'm not sure my figures are correct but it seemed to suggest that even with interest rates of 4% I would about breakeven against the 10 yr fixed rate. Can someone tell me how to work this out.

From this I'm thinking of sticking with my offset at 2.29% at least for the next two years.

cambs1999 · 14 February 2018 at 9:41AM

We use the offset mortgage as a normal repayment - we would be looking to pay around the same as if it was a repayment so payments of around £875 per month as well as the savings.

getmore4less · 14 February 2018 at 12:54PM

other thread as there is missing info not transferred over in first post.
(far easier to keep things in one thread)

http://forums.moneysavingexpert.com/showthread.php?t=5792683

I can have a 2 yr offset fixed rate at 1.84%
5 yr fixed rate at 1.94% or 10yr 2.49%

before this was

The best offset rate is a 2y fixed 1.84% but £725 booking fee or a 2y 2.29% no booking fee.

...........

The best 5 year is 1.94% or 1.79% with booking fee of £725 (so 1.94% looks better value for us taking into account around £12 per month for the booking fee).

Or a 10 year for 2.49%.

The 1.84 offset rate has booking fees and is over 2 years.

doing the fee/no fee using the same payment as on the 5y but over 2 year

After 2 years paying £488pm

£93,725 @ 1.84% £85,315
£93,000 @ 2.29% £85,382

This is too close to call with the offset funds the higher rate no fee could well be better option for the offset choice.

with offset funds and overpayment potential you need a better understanding of your cash flow.

I suspect your 2 real choices are
Offset at 2.29% or the no fee fix at 1.94% or the 10y but you have not said if that has a fee or not.

but then your offset is 2y so you should also include a 2y fix to do a proper comparison.

You say you have £28k offset but might need that at some point.
if that is not in the first 2 years

using the offset test calculation for the offset against the 5y

M : mortgage debt
S : standard rate
O : offset rate

C : savings capital
N : net savings rate

C/M == (O-S)/(O-N)

M : £93k
S : 1.94%
O : 2.29%

C : £28k
N : Solve for this

C/M == (O-S)/(O-N)
N= O - (O-S)M/C

N= 0.0229 - ((0.0229-0.0194)£93k/£28k
N= 0.011275

if you can get a net savings rate better than 1.1275% you are better of not offsetting at the start comparing against the 5y fix.

overpaying and building up the offset pot with change the numbers

re your numbers.

you have to account for the cashflow of savings.

You can't assume there is £28k offset for the full 10 years if you plan to use it at some point and with the non offset you have to account for the £28k sitting in savings somewhere

Given your cashflows you may be better off modelling this in a spread sheet for a 10 y plan.

if comparing against a 10y fix I would factor in some rate rises to the model for anything on a shorter fixed term.

I am a fan of offsets but you need to be aware of the trade off cost for the flexibility that you may never use.

cambs1999 · 20 February 2018 at 7:58PM

Thanks for your help.

I think I'm going to go for the 10 year fixed at 2.49% - it has no fees.

I have a telephone appointment with our current lender on Sat to reserve a rate.

Getmore4less - can you just help me work out what the break even figure would be between the 5 year fixed and 10 year fixed.

5 yr fixed 1.94%
10 yr fixed 2.49%
No fees for either.

I work it out that it will cost us around £25 more per month to take the 10 yr which as far as I can work out means after the 5 years is up if the interest rates have even gone up by a small amount we would be worse off, plus at this point we may end up having to pay to secure another good rate.

I'm just trying to work out what interest rate I would need to get after the 5 yrs to not be worse off.

I'm leaning towards the 10 yr as at the end of the fix I would hope to to have either paid it off in full by overpaying or use my husbands lump sum from his pension to clear it. We don't intend to move within the next 10 yrs. I like the idea of knowing what interest rate we'll pay for (hopefully) the rest of the term.

Thanks for all your help.

getmore4less · 20 February 2018 at 9:05PM

You may be surprised how much the rate can be at the 5y point.

you have 0.5% head start and the overpayments are working on a much smaller number after 5years

Also remember with the 5 year you also have a window to overpay more than the ERC limit to hit your 10 year goal.

will do the numbers tomorrow..

cambs1999 · 20 February 2018 at 10:40PM

Thanks so much getmore4less. It is much appreciated.

Just to clarify - now I know the exact details - the outstanding mortgage will be £94,000 and our term left is 18 yrs 8 months.

For the time being we will likely only be overpaying by around £100pm but if we take the 5 yr we will make that £125 (so use the £24 saving on top of the £100) - due to my husbands work starting to offering salary sacrifice we decided to not overpay as much on the mortgage but instead pay 20% into his pension.

I don't quite understand what you mean by "with the 5yr I have a window to overpay more than the ERC limit to hit 10 yr goal" - sorry can you just explain please?

I'm really keen to see what the figures will be so I can just make my mind up one way or the other!

Thanks again

Thrugelmir · 20 February 2018 at 10:40PM

cambs1999 wrote: »

I think I'm going to go for the 10 year fixed at 2.49% - it has no fees.

Sometimes peace of mind is the best option. Little point in trying to forecast the future direction of interest rates. BOE base rate fell from 5.75% to 0.5% in just 20 months. Puts into context when the BOE talk of interest rates rising quicker than people expect. Not the time to be complacent. When there's such good long term fixed rates on offer.

getmore4less · 21 February 2018 at 10:37AM

You can do this with a simple calculator if you just work through the steps.
I use full £ for payment on an interest only basis in this
http://www.whatsthecost.com/mortgage.aspx

for regular calcs you can use a spreadsheet but it helps to do a few by hand to work out what needs doing.

A mortgage is 3 numbers(amount,rate,payment) and time tells you how much is left.

your basic deatails will be

£94,000 (amount owing)
18 yrs 8 months. (224m full term)
1.94% 5y fix
2.49% 10y fix

your base repayment mortgages with no rate changes would.
£94,000 @ 2.49% 18y 8m £525pm interest £23,635
£94,000 @ 1.94% 18y 8m £501pm interest £18,099

Thats a difference of around £5,500 in interest if nothing changed.
to do a farer comparison make the payments the same
£94,000 @ 1.94% 18y 8m £525pm interest £17,064

that makes the potential saving up to £6,500

first next step is to work on the two main time points 5y and 10y using the £525 payment
your starting point is the 10y fix at Y5 and Y10

£94,000 @ 2.49% £525pm £72,941 £49,093
£94,000 @ 1.94% £525pm £70,517 £44,643

a potential saving over the 10y of £4,450

rates may have gone up at year 5, we can now work out if we start with £70,517 what rate do I need to end up with the same as the 10y at y10 £49,093

Using the calculator and changing the rate(* see below) till the number is right)
£70,517 @ 3.34% £525pm £49,083

that means if you can get a rate at least that good no worse off, that's (3.34%-1.94%) 1.4% higher than now

lets say they went up by ony 1% or by 2% so your new rate was 2.94% or 3.94%
£70,517 @ 2.94% £525pm £47,780 +£1,313
£70,517 @ 3.94% £525pm £51,090 -£1997

if you plug in your planned payment and any guess at rate rise you can quantify the guesses.

.................................
if you went for the 10y plan.
£94,000 @ 2.49% 10y £886pm interest £12,280
£94,000 @ 1.94% £886pm interest £9,204

that makes the potential saving up to £3,000

at Y5
£94,000 @ 1.94% 5y £886pm £47,790
rate to get that to zero over the next 5y
£47,790 @ 4.24% 5y £886pm

* ..........................................................
this was my sequence.
3.0% £47,974
4.0% £51,294
3.3% £48,951
3.4% £49,280
3.34% £49,083 close enough

getmore4less · 21 February 2018 at 10:40AM

I don't quite understand what you mean by "with the 5yr I have a window to overpay more than the ERC limit to hit 10 yr goal" - sorry can you just explain please?

if you take the 10y fix your overpayments will be limited but that may not be a problem as you can save them and if rates go up there is a chance they will earn more then the mortgage, the pension may use them all anyway.

if you take the 5y fix any surplus can be paid off at the 5y point.

2 yr offset or 5/10 year repayment

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