Offset or Fixed Rate?

[Gingerbear]

We have 15 years left on our mortgage and a 3yr fixed rate deal due to end in May. At the moment we have savings that amount to approx 23% of the mortgage amount. Would we be better off arranging another fixed rate deal, paying a chunk of the mortgage off with some of the savings or going for an offset mortgage?

Milge, do you work for a Building society?

Hi

We have got an Abbey flexible mortgage, which has a low interest rate 5.2 at the mo i think, which you can have a savings pot linked to. If you have any money in this pot then the you don't pay interest on the chunk of your mortgage, but equally it is very accessable , money in 5 days i think. You can over pay every month if you want and this extra money goes into the savings pot, the other thing you can do i organise a draw down on the mortgage and borrow money at the same interest rate as the mortgage.

I'm going through this dilemma too right now.
Depends how much flexibility you want really. If you want to keep the 23% handy in case of other expenditures then might be better to hang onto it than pay off a chunk of mortgage but if you want lower monthly outgoings then pay off (this is what we're going to do).
However if you want to hold onto the money I would put it somewhere other than into an offset fund as there are plenty of savings accounts around which will pay you 5% whereas mortgage rates are only 4.5% ish and there are even lower ones about.

Gingerbear can you stooze to increase the 23%? If so, you may be better off with offset. We certainly are. (Google stoozing if you aren't sure about this)

stooze? hmm, just off to Google

Gingerbeer - we have just done this and taken out a mortgage with First Direct.
Basically we have a current account and a savings account linked to the mortgage.
You could put the cash into the savings account and then this lowers the amount you pay on your mortgage.
The funds are always accessible so you can always withdraw from your savings account when needed.
We phoned London & Country for advice on the best mortgage to suit our needs www.lcplc.co.uk
Hope that helps

...sorry just realised I changed your name to a drink instead, sorry gingerbear!!

Sorry for Hijack folks but was looking for bella, are you OK?

Hiya Bramblina - yep doing well.
How are things with you?

We have had several 0% credit cards over the years - not sure what our credit rating would be to get another deal for a big enough lump sum to make it worthwhile
Good idea though - you'd need to be disciplined with money.

No worries Bella, it happens frequently.
Do London & Country charge for advice?

No Gingerbeer - thet only charge a fee when you actually apply for something through them

God sorry again !! - obviously just think I need to buy a can of it and get it out of my head!!

GB - our new mortgage is with Northern Rock. It is a fixed rate for 2 yrs (about 5% - cant' remember exactly but it's low). However, you can make overpayments whenever you like with no penalty. You can also take money out of it when you like, as long as it's at least £500, again with no penalty.

So you could get the mortgage you need but then slap your £23K into it which will reduced the payments you make, but have the flexibility to take money out without hassle if you need to.

In an ideal world I'd continue with our current account mortgage which is with RBS - basically your current account is your mortgage so you are overdrawn by your mortgage amount iywsim. Interest is charged daily so the more money you pay into it, and keep in it, the lower your payments. Using this account we paid off 20K in about 2 yrs!! Again, if you get a 'facility' (like OD limit) for the mortgage you have remaining but then bung your 23K in it - you'll paying much less for your mortgage meaning you will pay it off much sooner, but you can spend any of the 23K whenever you want.

So if your facility is for 150K and you put your 23K in, you are only paying interest on the 127K you owe but you can spend up to the 150K if you want to just by withdrawing and writing cheques.

We LOVE this account but we are moving and RBS won't lend us what we need - the Northern Rock one was the nearest we could get to that that would lend us what we needed. They lend based on credit rating and don't necessarily ask for proof of earnings either. We have found it so easy to deal with them.

Sorry, not 23K - anyway, you know what I mean!!

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Sponge - you need to take into account the tax benefits of the interest as well. You pay mortgage interest out of your taxed income, whilst you generally have to pay tax on savings income. So the 4.5% that you save by offsetting is the net amount whereas the 5% you get in a savings account is (usually) gross. If you are a higher rate tax payer the equivalent gross interest rate in offsetting is 7.5%. That is a harder rate to beat!

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Thanks for that Orinoco. Didn't realise offset could also be fixed rate! We would like to keep hold of our savings 'for emergencies' so perhaps offset could be better for us. We are with Yorkshire BS now, and it would make life very simple if we could switch to an offset deal with them.
The 'Top Mortgages' tables in the weekend papers look tempting, but when you look at some of the arrangement fees, re-valuation fees and redemption penalties, they are not such brilliant deals after all.

Thanks everyone else too for your comments. The Northern Rock deal looks interesting. I thought Northern Rock's arrangement fees were high though?

We have an offset mortgage and are very happy with it. I think you need to have quite a high positive balance for at least part of the month in order for them to compete with other mortgages. This is because they don't generally have the lowest mortgage rate available.

For convenience, it is fab. You basically don't have to worry about anything, especially when you have a mortgage reserve account (for extra borrowing) tied to it. Our basic mortgage was fairly low, so we got a reserve account up to 80% of the valuation. This means that we can do bits of work on the house and don't have to apply for other loans to cover it. Any extra borrowing is at the mortgage interest rate, and doesn't have the inflexible conditions that other loans have. You also don't pay any tax on your savings interest.

If you are really organised, you can make sure you pay all your bills at the last minute in order to keep the money in your account as long as possible. Also, you could open interest-free credit card accounts and use these for your day to day spending, paying only the minimum required each month while keeping the bulk of the money in your account saving mortgage interest.

Personally I think your savings should be in a tracker ISA or tracker investment plan especially if you don't need to touch over the next 15 years (but you have a limit on ISA investment per adult per year) and you should get the lowest interest mortgage you can with no redemption penalties