Offset Mortgages for Dummies - can someone please explain?!

[verygreenlawn]

We need to remortgage soon - coming off a fixed rate - and I'm looking at an offset mortgage.

Is there anyone that would be kind enough to explain a couple of points?

We've always had fixed rates before and every year (or when we remortgage) we've tried to pay off a lump sum off the capital. Each time we've remortgaged the past few years, we've reduced the term so as to make bigger payments to try and get shot of the mortgage quicker.

We could alternatively get an offset mortgage. We think it might suit us because DH gets a fairly big lump sum once a year - bonus - not guaranteed but he always gets something. Sometimes we spend it - if we need to, for eg for a car or something on the house - other times we've used some of it to pay off some capital on the mortgage or saved it.

With an offset mortgage, presumably all that money goes into one pot, right? So is there still any benefit to us reducing the term and therefore making bigger repayments every month - or would the effect of just having the "savings" pot be the same? In which case how do you decide the term/monthly payment amount?

If anyone has reached the end of this and can offer any general advice I'd really appreciate it - obviously I realise no-one can offer advice on our specific circumstances, I'm just hoping that scenario sounds familiar to someone out there?

There isnt any point in reducing the term, as it doent make any difference.

With my mortgage we both pay our salaries into the account, and the whatever is left at the end of the month, minus the interest payment, is what is coming off the mortgage. We get a monthly statement, that syas how much is left it, and gives an idea of how long it will take to pay off the total amount, at the rate you are going.

I found our offset mortgage brilliant. We paid off the debt far more quickly then we would have done with a normal mortage, and because of the flexibility of it, and the fact that the money didnt get tied up we were able to make any one-off large purchases that we wanted.

Thank you, that makes sense!

I think its easier to think of it as an extremely large overdraft, IYSWIM.

Sorry I meant to add, so you're effectively overpaying without actively deciding to do so, right? I was also wondering exactly how you knew where you stood financially, but the monthly statement makes sense too.

Yes I see what you mean about the overdraft - whereas I've been getting confused trying to think of it as mortgage interacting with savings, but effectively that's all it is - a big overdraft!

Yes thats right, everything that you dont spend is paying off the mortgage, but you can take it out too if you need to, right up as far as your borrowing facility allows, so you dont feel like the money is as unretrievable as it is when you make overpayments on a normal mortgage.

I love our offset mortgage.

We are on an interest only mortgage and at the moment, our savings almost match our mortgage (so our interest payment is almost nothing). However, we want to hold on to our savings (rather than pay off the mortgage completely) because we are about to buy another house, and because of some inheritance tax matters.

Because we are on interest only, we also overpay each month into our mortgage account and therefore, reduce the capital at the same time as keeping our savings.

It works really well for us. We have about 9 different accounts linked into it, so it means that all our money is working hard.

Thanks tigger, you've actually explained it better than my two hours of reading up on it on the internet - thank God for mumsnet!

Littlefish, that's interesting - one option for us is to move house in a couple of years, so I guess we want to have our cake and eat it - reduce debt now with a view to being able to extend it in a couple of years.

Would also really suit us to be able to write cheques for big stuff because at the moment we have to do loads of moving money around, waiting for stuff to clear etc.

We're thinking of an offset mortgage too. I am about to be made redundant so will have a big lump sum.

We would like it to be available in case I have trouble finding another job and in case DH gets made redundant too.

We also are planning an extension once things are more stable so would like the money to be available for that.

But at the same time it makes sense to try and reduce our mortgage payments so that things are more affordable while I'm not working so an offset mortgage sounds like our best bet.

Plus with the rubbish interest rates around and the tax advantages it means you essentially get a much better rate on your savings.

Which provider are you with littlefish as I would like one that you can link lots of accounts into?

We're with First Direct. DH and I both have a number of savings and current accounts which count towards the offsetting. I don't know if there is a limit to the number of accounts you can link. I think we have about 8 between us.

We've been really happy with them and are currently arranging a new mortgage for the new house, with them.

As an IFA I tend to recommend The Woolwich Offset mortgage. You are allowed up to 12 different saving pots that you can offset against the mortgage. You can choose, if you have savings in the pot whether to reduce the mortgage term (by the over payments) or you can redsuce your monthly mortgage payments as the mortgage amount is smaller.
However I would say that tracker rates are not so good at the moment since there is quite a large differential between them and the Bank Base Rate. Off my head I cannot remember but if you say it is around 2% above, if rates go up to 5% you will be paying 7%. Bear that in mind as it will be an expensive mortgage.
I think Northern Rock allow you to have an ordinary mortgage and let you make lump sum payments against it and you can have it back if you wish aat the same rate of interest as the mortgage. You might get a better rate of interest that way. But do give them a call and double check. (They may decide to credit score you everytime you want the money back and if you are having a difficult time and you have missd payments etc if your credit score goes down you may not be able to re access that money.)

Thank you, yes I think you're right about the trackers - the trouble is, the fixed rates are also a bit of a joke too - considering the last time we fixed at 4.99 (5 years ago) the base rate was a hell of a lot higher, and fixes now are not a great deal lower than that! We're going to have to do a bit of crystal ball gazing over the next few weeks .....

It all depends on the equity you have in your house if it is below 60% you will get a good deal, 75% or above and it will start getting expensive.
Have you approached your existing lender sometimes they offer good rates as they want to retain customers.

I heart my offset mortgage too!
I've had both a Woolwich/barclays one and now first direct - Woolwich internet interface was easier, you could 'name' your savings pots whereas with FD I have to remember which account number is for which purpose. Also I am feeling a bit peeed off with FD as their offset tracker is only available to new customers - so I can't remortgage onto it when my fix ends.
Other than that it is great! You can choose how much to pay off per month and hence manipulate the 'term' in that way (you can use a mortgage calculator to work out how roughly how much you need to pay to pay off in a certain time frame).