Offset mortgage v repayment.

[MegCleary]

We moved last year and luckily only now owe about £28000 and have 12 years left on our mortgage. But our interest rate is 8.4% so far we have paid approx £1800 in interest and about £4500 off the principal.

DH wants to keep this facility as we can overpay with out penalty and repay the full amount early with charges either. We have had this offset mortgage for years and repaid early due to some financial luck but just keep it going as a normal bank account.
My concern is the interest rate and with the cost of living flying up. I do think we will repay early but I also stress about income and wonder if we moved to a standard mortgage I would have more idea how we are doing financially as would have fixed repayment
Not sure what I am asking really! Would it be wise to move it?

I suppose you just need to model what you'll pay in interest over the course of the current mortgage, and what you'd pay over the course of a different mortgage if you arranged one now.

My understanding is that offset mortgage do tend to have a higher interest rate, but that you don't pay interest on the savings that you in the account. I wonder if we should get one next, as we tend to like to have a decent savings buffer.

How much is outstanding in total? And how much savings have you got?

I would switch unless you gave enough savings to cover the mortgage (£28k). If you did all payments would go straight to capital.

If you have a regular (non offset) repayment mortgage you can still make overpayments or pay in full. Why keep it if the rate is so high? Rate won't matter if savings offset full amount as no interest would be payable.

No savings, and we owe £28000. All wages and bonuses go in

If I'm understanding what you mean correctly, then it doesn't seem worthwhile for you to have an offset mortgage. I think it only make sense if you have a reasonable amount of savings, and so aren't paying interest on a lot of the outstanding mortgage.

For the sake of easy maths, day:
Start of month - 28k debt. 3k earnings. 8.4% on 25k. £5.75 interest a day.
End of month 28k debt, 0 earnings left. £6.44 a day interest.

28k debt on a 5% interest standard mortgage - £3.83 interest a day

Without a significant proportion of your debt as cash savings, you are hammering cash on this deal.

I wouldn't want to pay 8.4% on £28k if I didn't have to! You can do better.

OK in 9 months we gone from owing about £31000 to £26000 so the amount is going down. We bring in about £5000 a month, we probably have about £1000 left of that each month. Our facility is for about £70000
Not sure I can wean DH off the idea we can pay if off early like before.

So, what are you doing with that remaining 1000 a month? If that sat in the offset account, in 2 years you would be paying practically zero interest. THAT is worth doing.

How have you got zero savings if you aren't spending a grand of your income every month?

When you say you've had that mortgage for years, do you mean including the period when interest rates were 1-2% (or less)? 🙈

We had an Offset mortgage and kept it to the bitter end as it was a cheap and hassle free way of borrowing. We did, however, have savings in our account so we weren't paying much interest - and towards the end we didn't pay any interest at all on the mortgage as the savings balance exceeded the mortgage balance.

I think when we got it about 14 years ago it was 5.4%.
We had paid it off, about 6 years ago. We were mortgage free but still had our wages paid in the account and moved any money left after bills to a savings account which the paid by the end 4% interest. Managed to save about £40000.
So were in a position to move and wanted to keep the offset facility as it had served us well. Bought new place and needed about £77000 mortgage. The rate last year was about 6.2 Then lumped our savings in & we now owe about £27000
rate has since shot up to 8.4 and makes me nervous.
@SpringOfContentment we leave all money in the offset account and use it as a normal bank account.

If you were to take out a traditional mortgage, how much would you borrow?

I think you are using your offset very differently to me. Mine was years ago, but I borrowed eg 50k as a 90% mortgage. BUT I also had 14k cash (initially). So, my interest was calculated on 36k. I saved a lot, savings rose to 26k. Interest calculated on less than 20k, as I'd paid off 6k by that point.
But my savings and mortgage were always seperate balances.

Are you basically overpaying by a grand a month - the difference between your income and outgoings?? In which case you will be mortgage free in a couple of years, but with zero savings?

Yeah I think some months a grand others less. So yep mortgage free probably in a few years but no savings. Again the facility on the offset is up to 70k so if washing machine broke etc we would just buy it. Maybe we do need a small separate saving amount perhaps but DH feels more in the offset pays it off quicker.

If yours is the same as ours we were told that if we repaid the mortgage in full then the account remains open for the term so we can still withdraw from the mortgage twice a year.

No I don't think it's worth it for you guys.

If you still want the flexibility to overpay etc, go for a tracker it'll be at least 2% lower and normally gives you that.

If BOE goes down then you'll also be winning.

I'm guessing that if you owe £28K your loan to value is not that high (unless it's a very cheap house), and you would hopefully have access to lower interest rates.

Paying a high interest rate means that less money is going into repayment, so without the offset you might be able to pay off a conventional mortgage with overpayment options faster. And you can save the difference separately and then pay off a lump sum at the end of a deal or at any other time it's permitted.

That's a crazy high rate. You can get a tracker with no early repayment charges for much cheaper, eg TSB have one which is currently around 5.5% which will allow you to overpay and will mean you are paying off quicker.

If you’ve no savings there is no point in the offset. If early repayment is the goal you could set a shorter term to avoid early repayment charges, which might be good if your income is stable, or you
could pay off the minimum amount to the mortgage on a standard repayment term, save your overpayments I to am lump sum and reduce the balance periodically (I.e at the end of a fixed term- so saving a monthly‘overpayment’ of £1k into a savings account for the two years of a fixed term repayment would allow you to get a much shorter deal by paying in the 24k saved when remortgaging.

We have an offset which I’m paying 0% on as the savings balance and the mortgage balance are the same.