Remortgaging to offset mortgage; newbie questions..
Discussion
++Warning: the figures below are examples for simplicity, although are approx. proportional to the real life figures++
My mortgage is coming towards the end of its fixed term deal. It was my first mortgage and I have never remortgaged before. I’d like to remortgage to an offset. I can get a deal at 3.6% (0.3% monthly) with no fees, etc.
I have a house worth £100k. I have a mortgage on the house which is £50k. I have £15k in savings.
I’d also like to reduce the mortgage amount by using some of the savings to do this (I realise this makes no difference to the net mortgage balance when offsetting, but it’s a feel-good thing!).
I plan to put £9k of my savings to reduce the new mortgage to £41k. The net balance for offset purposes will be then be £35k (I.e. £41k less the £6k remaining savings).
Question 1: How does the practicalities of this work? My existing lender needs to be paid £50k. Will the new lender will pay them £41k and I pay the balance to my current lender to settle? I have limits on overpayments which I’m close to already with the current lender.
I am able to save £1500 a month.
Question 2: If I understand Offsetting correctly:
In month 1 my mortgage payment will be £35k x 0.3% (i.e. 3.6%/12) =£105
Next month, my net mortgage balance is £33.5k, so the month 2 mortgage payment will be £33.5k x 0.3% = £100.50, and so on.
Question 3:I’m aware that an offset mortgage is essentially an interest only mortgage. I’ve also read that lenders are ‘cracking down’ and that I will need to demonstrate I have a repayment vehicle in place. My vehicle is simply to put £1500 a month into savings, which will mean the net mortgage balance will reach zero within 2-3 years or so, well below the term of the mortgage which will be 20 years.
Is this enough to satisfy a lender?
My mortgage is coming towards the end of its fixed term deal. It was my first mortgage and I have never remortgaged before. I’d like to remortgage to an offset. I can get a deal at 3.6% (0.3% monthly) with no fees, etc.
I have a house worth £100k. I have a mortgage on the house which is £50k. I have £15k in savings.
I’d also like to reduce the mortgage amount by using some of the savings to do this (I realise this makes no difference to the net mortgage balance when offsetting, but it’s a feel-good thing!).
I plan to put £9k of my savings to reduce the new mortgage to £41k. The net balance for offset purposes will be then be £35k (I.e. £41k less the £6k remaining savings).
Question 1: How does the practicalities of this work? My existing lender needs to be paid £50k. Will the new lender will pay them £41k and I pay the balance to my current lender to settle? I have limits on overpayments which I’m close to already with the current lender.
I am able to save £1500 a month.
Question 2: If I understand Offsetting correctly:
In month 1 my mortgage payment will be £35k x 0.3% (i.e. 3.6%/12) =£105
Next month, my net mortgage balance is £33.5k, so the month 2 mortgage payment will be £33.5k x 0.3% = £100.50, and so on.
Question 3:I’m aware that an offset mortgage is essentially an interest only mortgage. I’ve also read that lenders are ‘cracking down’ and that I will need to demonstrate I have a repayment vehicle in place. My vehicle is simply to put £1500 a month into savings, which will mean the net mortgage balance will reach zero within 2-3 years or so, well below the term of the mortgage which will be 20 years.
Is this enough to satisfy a lender?
DJC said:
++Warning: the figures below are examples for simplicity, although are approx. proportional to the real life figures++
My mortgage is coming towards the end of its fixed term deal. It was my first mortgage and I have never remortgaged before. I’d like to remortgage to an offset. I can get a deal at 3.6% (0.3% monthly) with no fees, etc.
I have a house worth £100k. I have a mortgage on the house which is £50k. I have £15k in savings.
I’d also like to reduce the mortgage amount by using some of the savings to do this (I realise this makes no difference to the net mortgage balance when offsetting, but it’s a feel-good thing!).
I plan to put £9k of my savings to reduce the new mortgage to £41k. The net balance for offset purposes will be then be £35k (I.e. £41k less the £6k remaining savings).
Question 1: How does the practicalities of this work? My existing lender needs to be paid £50k. Will the new lender will pay them £41k and I pay the balance to my current lender to settle? I have limits on overpayments which I’m close to already with the current lender.
I am able to save £1500 a month.
Question 2: If I understand Offsetting correctly:
In month 1 my mortgage payment will be £35k x 0.3% (i.e. 3.6%/12) =£105
Next month, my net mortgage balance is £33.5k, so the month 2 mortgage payment will be £33.5k x 0.3% = £100.50, and so on.
Question 3:I’m aware that an offset mortgage is essentially an interest only mortgage. I’ve also read that lenders are ‘cracking down’ and that I will need to demonstrate I have a repayment vehicle in place. My vehicle is simply to put £1500 a month into savings, which will mean the net mortgage balance will reach zero within 2-3 years or so, well below the term of the mortgage which will be 20 years.
Is this enough to satisfy a lender?
Q1; you can either clear the £9k off the balance before you remortgage, during the remortgage process by giving it to your solicitor or after you've moved the mortgage to the new lender. You be best off clearing it before you start the remortgage process.My mortgage is coming towards the end of its fixed term deal. It was my first mortgage and I have never remortgaged before. I’d like to remortgage to an offset. I can get a deal at 3.6% (0.3% monthly) with no fees, etc.
I have a house worth £100k. I have a mortgage on the house which is £50k. I have £15k in savings.
I’d also like to reduce the mortgage amount by using some of the savings to do this (I realise this makes no difference to the net mortgage balance when offsetting, but it’s a feel-good thing!).
I plan to put £9k of my savings to reduce the new mortgage to £41k. The net balance for offset purposes will be then be £35k (I.e. £41k less the £6k remaining savings).
Question 1: How does the practicalities of this work? My existing lender needs to be paid £50k. Will the new lender will pay them £41k and I pay the balance to my current lender to settle? I have limits on overpayments which I’m close to already with the current lender.
I am able to save £1500 a month.
Question 2: If I understand Offsetting correctly:
In month 1 my mortgage payment will be £35k x 0.3% (i.e. 3.6%/12) =£105
Next month, my net mortgage balance is £33.5k, so the month 2 mortgage payment will be £33.5k x 0.3% = £100.50, and so on.
Question 3:I’m aware that an offset mortgage is essentially an interest only mortgage. I’ve also read that lenders are ‘cracking down’ and that I will need to demonstrate I have a repayment vehicle in place. My vehicle is simply to put £1500 a month into savings, which will mean the net mortgage balance will reach zero within 2-3 years or so, well below the term of the mortgage which will be 20 years.
Is this enough to satisfy a lender?
Q2; Roughly speaking yes.
Q3; I don't think your understanding what an Offset mortgage is.....it's not an Interest Only mortgage.
DJC said:
I have a house worth £100k. I have a mortgage on the house which is £50k. I have £15k in savings.
I am able to save £1500 a month.
Question 1: How does the practicalities of this work? My existing lender needs to be paid £50k. Will the new lender will pay them £41k and I pay the balance to my current lender to settle? I have limits on overpayments which I’m close to already with the current lender.
Question 2: If I understand Offsetting correctly:
In month 1 my mortgage payment will be £35k x 0.3% (i.e. 3.6%/12) =£105
Next month, my net mortgage balance is £33.5k, so the month 2 mortgage payment will be £33.5k x 0.3% = £100.50, and so on.
Question 3:I’m aware that an offset mortgage is essentially an interest only mortgage. I’ve also read that lenders are ‘cracking down’ and that I will need to demonstrate I have a repayment vehicle in place. My vehicle is simply to put £1500 a month into savings, which will mean the net mortgage balance will reach zero within 2-3 years or so, well below the term of the mortgage which will be 20 years.
Is this enough to satisfy a lender?
1. Your new lender will grant you a facility. Say £66000. Think of that as your overdraft limit. You will be able to draw down as much of that as you need to repay your old mortgage. I am able to save £1500 a month.
Question 1: How does the practicalities of this work? My existing lender needs to be paid £50k. Will the new lender will pay them £41k and I pay the balance to my current lender to settle? I have limits on overpayments which I’m close to already with the current lender.
Question 2: If I understand Offsetting correctly:
In month 1 my mortgage payment will be £35k x 0.3% (i.e. 3.6%/12) =£105
Next month, my net mortgage balance is £33.5k, so the month 2 mortgage payment will be £33.5k x 0.3% = £100.50, and so on.
Question 3:I’m aware that an offset mortgage is essentially an interest only mortgage. I’ve also read that lenders are ‘cracking down’ and that I will need to demonstrate I have a repayment vehicle in place. My vehicle is simply to put £1500 a month into savings, which will mean the net mortgage balance will reach zero within 2-3 years or so, well below the term of the mortgage which will be 20 years.
Is this enough to satisfy a lender?
So you're now 50k overdrawn. You put your savings into that account and you're £35k overdrawn.
2. Now you pay interest on your overdrawn balance (assume calculated on a daily basis and totted up at the end of thee month).
With some offsets you can keep savings in a separate account maintained in credit, but then they won't be offset. So you'd be paying interest on 50k as the price of holding 15k as a credit in a separate account.
If your outgoings each month are 1500 less than you income, then after each month your overdrawn balance will reduce by 1500. If you start at 35k, you will have repaid your borrowings completely after 23.66 months.
3. It's not an interest only mortgage. It's a mortgage with no structure or mechanism to repay the capital, other than your desire to repay it.
The suggestion that you clear the 9k off your existing mortgage before moving over is just plain wrong. A key feature of the offset is that you have flexibility and keep control of your savings - if you paid it into the mortgage you'd lose a load of that flexibility.
Another tip I'd give is ask for more 'overdraft' than you need. Sitting at 0.68% interest for best part of 3 years now my biggest regret is that I didn't secure more overdraft facility at that rate!
Another tip I'd give is ask for more 'overdraft' than you need. Sitting at 0.68% interest for best part of 3 years now my biggest regret is that I didn't secure more overdraft facility at that rate!
Olf said:
The suggestion that you clear the 9k off your existing mortgage before moving over is just plain wrong. A key feature of the offset is that you have flexibility and keep control of your savings - if you paid it into the mortgage you'd lose a load of that flexibility.
Another tip I'd give is ask for more 'overdraft' than you need. Sitting at 0.68% interest for best part of 3 years now my biggest regret is that I didn't secure more overdraft facility at that rate!
It's not plain wrong, it's what he asked for. He said he wanted to reduce the debt to £41k and then Offset the remaining £6k. It may not be what you'd want but it's what he said he wanted to do. Don't forget, it's all well and good 'Offsetting' all this interest but at some point you still need to pay off the capital......Another tip I'd give is ask for more 'overdraft' than you need. Sitting at 0.68% interest for best part of 3 years now my biggest regret is that I didn't secure more overdraft facility at that rate!
Sarnie said:
Q3; I don't think your understanding what an Offset mortgage is.....it's not an Interest Only mortgage.
When I say savings, I mean an account linked to the offset mortgage. So as the savings increase, the net mortgage balance (i.e. the mortgage less linked savings accounts) decrease.First Direct said:
Important Notes
first direct Offset Mortgages are interest only mortgages. The monthly payments shown on the next screen will cover only the interest charged on your mortgage.
This payment does not cover an amount that you need to pay to a repayment vehicle. You are responsible for making your own arrangements to repay your mortgage at the end of the mortgage term
You must demonstrate that you have a suitable repayment vehicle in place. You may choose to use an endowment policy or another investment or savings plan.
first direct Offset Mortgages are interest only mortgages. The monthly payments shown on the next screen will cover only the interest charged on your mortgage.
This payment does not cover an amount that you need to pay to a repayment vehicle. You are responsible for making your own arrangements to repay your mortgage at the end of the mortgage term
You must demonstrate that you have a suitable repayment vehicle in place. You may choose to use an endowment policy or another investment or savings plan.
Olf said:
The suggestion that you clear the 9k off your existing mortgage before moving over is just plain wrong. A key feature of the offset is that you have flexibility and keep control of your savings - if you paid it into the mortgage you'd lose a load of that flexibility.
Another tip I'd give is ask for more 'overdraft' than you need. Sitting at 0.68% interest for best part of 3 years now my biggest regret is that I didn't secure more overdraft facility at that rate!
Thanks. However, I don't want or need that flexibility. I realise it probably makes little sense to most people, but I'm looking to clear the mortgage in its entirety in the shortest time frame possible. As soon as the net mortgage balance reaches £0 (or very shortly after), I would intend to pay off and clear the mortgage.Another tip I'd give is ask for more 'overdraft' than you need. Sitting at 0.68% interest for best part of 3 years now my biggest regret is that I didn't secure more overdraft facility at that rate!
Paddy_N_Murphy said:
OP I am confused.
Are you looking to increase your savings po? or reduce your (Net) Mortgage hole?
Reduce net mortgage by linking a savings account (or group of accounts with the same bank - First Direct) to the Offset mortgage. Maybe I'm not understanding this correctly, but my understanding of the FD Offset was that a linked account credit balance is set against the mortgage debit balance.Are you looking to increase your savings po? or reduce your (Net) Mortgage hole?
I.e., Mortgage balance of £35k, linked savings account of £15k = Net balance of £20k for interest purposes.
Paddy_N_Murphy said:
Yes that is the base understanding - you mention paying more in to the savings though (£1500 pm IIRC) whe you really want to be throwing that at the Mortgage debt.
Thanks 
When I mention paying to savings, I mean into a linked account. This has the same effect as paying into the mortgage account directly in that it reduces the net mortgage balance as your option 2.
I don't mean holding the savings in a seperate account that is not linked in any way to the mortgage which would be your option 1.
I could, I guess, simply throw the £1500 a month as a mortgage overpayment directly onto the mortgage account.
The £1500 savings (for example) are after paying the mortgage interest, that is factored into my other expenditure elsewhere. Therefore, the net mortgage balance would be £35k in month 1, £33.5k in month 2, £32k in month 3, etc.
I've probably overcomplicated this
DJC said:
Thanks
When I mention paying to savings, I mean into a linked account. This has the same effect as paying into the mortgage account directly in that it reduces the net mortgage balance. I don't mean holding the savings in a seperate account that is not linked in any way to the mortgage.
I could, I guess, simply throw the £1500 a month as a mortgage overpayment directly onto the mortgage account.
The £1500 savings (for example) are after paying the mortgage interest, that is factored into my other expenditure elsewhere. Therefore, the net mortgage balance would be £35k in month 1, £33.5k in month 2, £32k in month 3, etc.
I've probably overcomplicated this
Yep When I mention paying to savings, I mean into a linked account. This has the same effect as paying into the mortgage account directly in that it reduces the net mortgage balance. I don't mean holding the savings in a seperate account that is not linked in any way to the mortgage.
I could, I guess, simply throw the £1500 a month as a mortgage overpayment directly onto the mortgage account.
The £1500 savings (for example) are after paying the mortgage interest, that is factored into my other expenditure elsewhere. Therefore, the net mortgage balance would be £35k in month 1, £33.5k in month 2, £32k in month 3, etc.
I've probably overcomplicated this
It seems to me that your main aim is to clear the debt as quick as humanly possible. Why don't you just take a straight repayment mortgage over about five years, reduce the balance with your savings and blitz it with over payments, and get it cleared asap. It seems to me that you wouldn't actually be utilising an Offset mortgage for what it's intended for. They are intended to be used to allow you to reduce the chargeable monthly interest whilst keeping saving liquid without having to commitment the money to reducing the balance, but all you've mentioned is wanting to reduce the balance asap......
OP, your understanding is correct. best approach with the offset is to pay your wages into the offset account, then setup a DD to your current account to cover living expenses, reduces the likelihood that you'll live off the offset balance and not save enough. If you can show your ability to save then that would be a satisfactory repayment vehicle.
It is an interest only mortgage in effect, but you have complete freedom to determine your own capital repayment profile. ie you can repay 10k this year, 7k next year, then draw down 5k for a new car in year three if you want, or any other combination. you just need good discipline and a good spreadsheet if you want to know what the effect of buying that M3 is likely to be.
It is an interest only mortgage in effect, but you have complete freedom to determine your own capital repayment profile. ie you can repay 10k this year, 7k next year, then draw down 5k for a new car in year three if you want, or any other combination. you just need good discipline and a good spreadsheet if you want to know what the effect of buying that M3 is likely to be.
DJC said:
Reduce net mortgage by linking a savings account (or group of accounts with the same bank - First Direct) to the Offset mortgage. Maybe I'm not understanding this correctly, but my understanding of the FD Offset was that a linked account credit balance is set against the mortgage debit balance.
I.e., Mortgage balance of £35k, linked savings account of £15k = Net balance of £20k for interest purposes.
I'm not sure that's how it will work, not least because I can't see any bank paying you interest on your credit balance of 15k, but at the same time only charging you interest on 20k instead of 35K. They are unlikely to give you the benefit of the the 15k twice. I.e., Mortgage balance of £35k, linked savings account of £15k = Net balance of £20k for interest purposes.
Some banks have an offset that links a non interest earning current account to a mortgage account; mine, for example, clears credit or debit balances on the current account down to zero at the end of each day with an automatic transfer to/from the mortgage account.
We also have interest earning savings accounts for the kids, and those are not credited against nor swept into the mortgage account at the end of the day.
Greg66 said:
I'm not sure that's how it will work, not least because I can't see any bank paying you interest on your credit balance of 15k, but at the same time only charging you interest on 20k instead of 35K. They are unlikely to give you the benefit of the the 15k twice.
Some banks have an offset that links a non interest earning current account to a mortgage account; mine, for example, clears credit or debit balances on the current account down to zero at the end of each day with an automatic transfer to/from the mortgage account.
We also have interest earning savings accounts for the kids, and those are not credited against nor swept into the mortgage account at the end of the day.
Thanks Greg. First Direct enable you to link current and savings account to your Offset mortgage account to provide an overall net figure which the interest is then charged on. I would not receive any credit interest on an account linked to the Offset mortgage. (I don't think I suggested I would, but if I did: apologies!)Some banks have an offset that links a non interest earning current account to a mortgage account; mine, for example, clears credit or debit balances on the current account down to zero at the end of each day with an automatic transfer to/from the mortgage account.
We also have interest earning savings accounts for the kids, and those are not credited against nor swept into the mortgage account at the end of the day.
I was unaware that First Direct was unique in this respect. My assumption that it wasn't unique has probably contributed to the confusion.
Sarnie said:
Yep
It seems to me that your main aim is to clear the debt as quick as humanly possible. Why don't you just take a straight repayment mortgage over about five years, reduce the balance with your savings and blitz it with over payments, and get it cleared asap. It seems to me that you wouldn't actually be utilising an Offset mortgage for what it's intended for. They are intended to be used to allow you to reduce the chargeable monthly interest whilst keeping saving liquid without having to commitment the money to reducing the balance, but all you've mentioned is wanting to reduce the balance asap......
This is what I currently do, I've a standard repayment mortgage (albeit with an overpayment limit), I overpay as much as I can within that limit and put any additional into a savings account which I will use to pay off a chunk of the mortgage come remortgage time. It seems to me that your main aim is to clear the debt as quick as humanly possible. Why don't you just take a straight repayment mortgage over about five years, reduce the balance with your savings and blitz it with over payments, and get it cleared asap. It seems to me that you wouldn't actually be utilising an Offset mortgage for what it's intended for. They are intended to be used to allow you to reduce the chargeable monthly interest whilst keeping saving liquid without having to commitment the money to reducing the balance, but all you've mentioned is wanting to reduce the balance asap......
Remortgaging to another repayment mortgage is of course is one option, but the reasons I preferred the Offset option are:
1) Whilst I could take out a repayment over 5 years with a high standard monthly payment which would be affordable, there is no flexibility should one month I need to save less. This has yet to happen in several years, but you never know. I don't want to find myself in a situation where I cannot afford the self-imposed high standard monthly payment for whatever reason.
2) My savings are split between 'Long term' savings (approx 90%), i.e. my mortgage repayment vehicle (which will then, in part, become my retirement vehicle following mortgage completion) and 'Short term' savings (approx 10%) which I put aside for ringfenced specifics such as car maintenance, holidays, building maintenance, etc. Offset allows me to keep this 10% as available funds should they be needed (they will be, due to their nature) but whilst taking advantage of not being charged mortgage interest for the value of these short-term savings funds from one month to next.
Essentially I am attracted to the flexibility of the Offset mortgage, but perhaps not for the exact same reasons that most people are. However, I'm far from an expert so will listen to other options that'd work well too.
You're correct in that I want to clear the mortgage as soon as possible as a priority.
I'll admit my personal finances are needlessly complex, but I am particularly anal about budgets, funds, cashflow, etc.
DJC said:
This is what I currently do, I've a standard repayment mortgage (albeit with an overpayment limit), I overpay as much as I can within that limit and put any additional into a savings account which I will use to pay off a chunk of the mortgage come remortgage time.
Remortgaging to another repayment mortgage is of course is one option, but the reasons I preferred the Offset option are:
1) Whilst I could take out a repayment over 5 years with a high standard monthly payment which would be affordable, there is no flexibility should one month I need to save less. This has yet to happen in several years, but you never know. I don't want to find myself in a situation where I cannot afford the self-imposed high standard monthly payment for whatever reason.
2) My savings are split between 'Long term' savings (approx 90%), i.e. my mortgage repayment vehicle (which will then, in part, become my retirement vehicle following mortgage completion) and 'Short term' savings (approx 10%) which I put aside for ringfenced specifics such as car maintenance, holidays, building maintenance, etc. Offset allows me to keep this 10% as available funds should they be needed (they will be, due to their nature) but whilst taking advantage of not being charged mortgage interest for the value of these short-term savings funds from one month to next.
Essentially I am attracted to the flexibility of the Offset mortgage, but perhaps not for the exact same reasons that most people are. However, I'm far from an expert so will listen to other options that'd work well too.
You're correct in that I want to clear the mortgage as soon as possible as a priority.
I'll admit my personal finances are needlessly complex, but I am particularly anal about budgets, funds, cashflow, etc.
We've been on an offset mortgage for the last 7 years and it has been ideal. It is especially worthwhile if you are self-employed or have a savings pot.Remortgaging to another repayment mortgage is of course is one option, but the reasons I preferred the Offset option are:
1) Whilst I could take out a repayment over 5 years with a high standard monthly payment which would be affordable, there is no flexibility should one month I need to save less. This has yet to happen in several years, but you never know. I don't want to find myself in a situation where I cannot afford the self-imposed high standard monthly payment for whatever reason.
2) My savings are split between 'Long term' savings (approx 90%), i.e. my mortgage repayment vehicle (which will then, in part, become my retirement vehicle following mortgage completion) and 'Short term' savings (approx 10%) which I put aside for ringfenced specifics such as car maintenance, holidays, building maintenance, etc. Offset allows me to keep this 10% as available funds should they be needed (they will be, due to their nature) but whilst taking advantage of not being charged mortgage interest for the value of these short-term savings funds from one month to next.
Essentially I am attracted to the flexibility of the Offset mortgage, but perhaps not for the exact same reasons that most people are. However, I'm far from an expert so will listen to other options that'd work well too.
You're correct in that I want to clear the mortgage as soon as possible as a priority.
I'll admit my personal finances are needlessly complex, but I am particularly anal about budgets, funds, cashflow, etc.
After studying mortgage figures, it became apparent that we would repay around 400k over 25 years for an inital mortgage of 200k.
Offsetting will give you maximum in repaying off your mortgage. The aim is to max out you linked savings as quick as possible to reduce your interest payments to virtually nil. Of course, if life takes an unexpected turn you still have the option to release some savings - think unemployment/ill health. With straightforward repayment you lose control of the capital you hand over.
I see it as a cheap 25 year loan....
Of course you will need to repay capital at some point, and if things go well hopefully you will be in profit.
stanwan said:
Of course you will need to repay capital at some point, and if things go well hopefully you will be in profit.
I thought the deal with off-set mortgages was that you continued to make the same payment regardless of your savings so that you reduce the outstanding capital quicker than on a repayment mortgages?If the possibility exists (as it seems to with First Direct) to reduce your monthly payment then you really ought to make sure you have some completely separate way of paying off the mortgage when it's due.
Deva Link said:
I thought the deal with off-set mortgages was that you continued to make the same payment regardless of your savings so that you reduce the outstanding capital quicker than on a repayment mortgages?
If the possibility exists (as it seems to with First Direct) to reduce your monthly payment then you really ought to make sure you have some completely separate way of paying off the mortgage when it's due.
Offset arrangments such as with FD are interest only. Of course, once you have a 100% offset you can move the funds over and clear the mortgage. If the possibility exists (as it seems to with First Direct) to reduce your monthly payment then you really ought to make sure you have some completely separate way of paying off the mortgage when it's due.
THe alterantive is to reach max offset ASAP and then keep it offset for the duration of the mortgage or until you sell. You have ready access to a large savings surplus and a loan with a v favourable interest rate
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