10 year fixed or 2 year offset at lower rate

[fitflop]

Anyone got any advice?

We're hoping to pay off our mortgage in the next 10 years.

We can hopefully get a 10 year fixed at 2.89 no fees. However, we currently have an offset mortgage which if we give up we won't be able to get again to new income levels required.

The offset is 1.49 above base rate for two years, so currently 1.99 which would save us £145 a month. We don't intend to move. I just don't know what to do. We use our childrens savings to offset against the mortgage as their rate of interest would be so low but at some point in the next 10 years these would need to be given to them.

I am only going to address one of the issues you ask as I am fundamentally opposed to one of your points (that you are using your children's savings to offset your mortgage); on the one hand yes, OK maybe, if this is money you are saving for their Uni funds but NO if this is money gifted to them by relatives which should be in named accounts so that correct tax/allowances are allocated. Faced with a 10 year term remaining on the mortgage, I weighed up the 10 year, fixing for 2 x 5 year terms versus doing 5 x 2 year deals and opted for the former just because my tolerance for the bureacracy for remortgaging was fairly low. No one has a crystal ball; if there was an obvious path everyone would be doing it.

I have to disagree with the comment opposed to you using the children's savings to offset against your mortgage. I'm assuming that you are responsible enough to take care of your children and not leave them out of pocket. Over the next 10 years, yes they will be missing out on the compound interest that would have accrued, but as you say the rates are so minimal. I would also say that the faster you are able to pay off this mortgage, the sooner these savings can be put into some kind of vaguely worthwhile savings bond / scheme. You may also consider using the extra time this gives you to pay them the compound interest they missed out on instead of (in effect) giving this interest to a mortgage company / bank.

On to your main question, the 10 year fix does give you the security of knowing your rate, but the loss of the offset may well make this more expensive in terms of interest accrued. This is particularly relevant when you are currently on a 1.49+BBR (Bank Base Rate) rate, with an offset (although without the numbers it's difficult to quantify this for you). What is the revert rate on the 1.49%+BBR? I would take this into consideration, if this is the SVR (last time I checked the market SVR average was still well above the fix and the two year tracker you are discussing.

The amount of guesswork included in trying to predict the BBR over 10 years makes this a question of preference mostly.

Your 10 year rate gives you consistency, with no risk of change (if you are intending to repay within 10 years). If you do however change your mind, consider the Early Repayment Charges within this deal (as well as the ability to make overpayments).

Currently the estimates are that the BBR will stay around it's current level for the next year or longer (possibly even dropping). Assuming that there are no Early Repayment Charges after the 2 year period, why not use the low rate and offset to hit the mortgage hard and consider fixing after the 2 year period is up?

If you have any more questions, let me know, I'm happy to help.

childrens' savings when base rates are so low are pretty much wasted money
base rates are not going upwards by much for years
stick with your current low rate
pay of the mortgage
THEN throw money into your kids savings / uni / housing

Last time I weighed it up just before Christmas. I looked at what level interest rates need to get too to claw back the savings in the short term and I was only looking at a 5 year fix. For me rates need to get to about 5% pretty quickly to make it worth fixing now. So we stuck with our tracker.