Mortgages! Off-set, fixed, tracker - your views please

[ForestFloor]

DH and I are very nervous about money - it comes from both of us being very skint when we were growing up. We are about to double our mortgage (gulp) - we will still be under 3xsingle salary though (phew), and the mortgage will be less than 50% of the value of the house (phew again). Our mortgage is 70k currently and want to borrow another 70k. We also have some money in the bank (about 40k).

We are seeing an IFA next week, but I wanted to get an oberview before we go. So, how does it all work?

Can we extend our mortgage (would there be a huge fee?), or do we get another one for the new 70k? If a new one, should we fix it or have a tracker? How do off-set mortgages work, given we have 40k? I like the idea of them, but am worried that the 40k might get whittled away (at the moment it is unrtouchable).

Any views appreciated - I am not looking for professional advice, just opinions/experiences

I know a sunny Thursday morning isn't the best time to chat about this, but does anyone have any views they could share? DH are I are wary about being talked into something by the IFA tbh...

DH and I are currently in a similar position, as we own half the house. We have an mortgage with an offset savings account, where we put our savings and any lump sums. We also overpay our mortgage every month - the overpayments go into the offset account and this reduces the interest/time left on the mortgage. It is a brilliant way of saving - much better than the interest you could make in any savings account. The money is still accessible in an emergency. In your position I would definitely recommend an offset mortgage.

Having said that, we are just about to stretch ourselves and buy a much more expensive house! We are going fixed for two years, then after that it will be a tracker but on a lower base rate. We still have the option to overpay the mortgage though (if we are able to!).

PS Just thought I'd add that having the offset really encourages us to pay the mortgage off quickly, and it feels great to see the years coming off after we've put in a lump sum, for example. Because of this we could never bring ourselves to take money out of the offset account, as psychologically it feels bad to see the mortgage go up again. But it's good to know the option is there in an emergency.

Thanks cathbath, so the offset is just like a normal savings account? Can it be set up so you just have the mortgage coming out and nothing else? What does the statement look like - is the 'deposit' side just gone, so the blanace is just the martgage less the deposit? Help!

DH and I have an offset and it is fab (First Direct are very very good). We have a current account a mortgage account and a savings account. We have to pay enough into the current account to cover the mortgage interest and that is taken out automatically each month. We regularly pay in enough to cover a repayment as well and then sweep any money either of us have at the end of the month into the savings account.

e.g. mortgage is 200k. Interest is 250 per month. We pay 1500 into the savings account anyway plus extras at the end of the month. We should be saving about 10 years over the term of the mortgage but can also overpay without penalty and buy back at any point (again without penalty0. Really is fab.

Ours is with Santander and just has a mortgage and a savings account (offset). The minimum monthly payments go into the mortgage, but any overpayments automatically go into the savings account. The statement shows the mortgage and the savings separately. So you can see your life savings as a lump sum rather than swallowed up by the mortgage, but you can also see how the savings are working to reduce the term of the mortgage. It really makes it feel worthwhile to put any spare cash into there.

Personally I would choose a long-term fixed rate at the moment. DH and I planning on getting a ten-year fix. But then we are very risk-averse when it comes to mortgages! I think it's a fair bet that mortgage interest rates will go up in the medium- to long-term and I would prefer the security of knowing I wasn't going to have to face an 8% or higher rate any time soon.

Don't be fooled by those who point to the Bank of England rates as being steady and/ or not likely to shoot up. As I understand it, the BoE rate is only tangentially related to the cost of mortgages, which I are priced according to the cost of banks lending to each other - called the LIBOR rate.

A knowledgable friend talked me out of offset mortgages a few months ago, but I can't remember the reason why so that's not much help, is it??! I would think a good IFA could give you a likely estimate of how much your savings could earn in a savings account over the term of a mortgage, compared to how much you would save in mortgage interest by offsetting your capital against your mortgage borrowings.

if you've got 40k in savings then you'd be mad not to get an offset mortgage, as you will only be paying interest on 100k not 140k. you can get offsets with fixed or tracker rates so your first decision is whether you want to go offset or not.

We went with an offset because we are utterly crap about doing any other financial planning. Money (slowly) piles up in our savings and we keep meaning to open an isa or invest or something but don't so this is our idiot-proof way of making sure that our savings is doing something other than earnying 0.01% interest.

I think it would depend on what your mortgage currently is as to whether it's best to increase it or replace with a new one.
Are you tied into a fixed rate and what's the penalty for paying off early?
As for fixed rate or tracker my brother (who's a FA) said that while some people like fixed rates there are some really good tracker mortgages around at the moment and told us to look at the First Direct ones. He then said he was recommending their offset mortgage at the moment to alot of people at the moment.
So .... we're just getting an offset from First Direct (no fee base rate tracker). Is v good deal - 2.89%.
There are (obviously) no fees and no early repayment charges and if we find there's a better deal to be had further down the road or would prefer the reassurance of a fixed rate it'll be easy to change.
Because we've been with First Direct for 20 years it also only took about 20 minutes to arrange by phone too! Easy peaesy.

Thanks everyone for all your views. They have been really helpful.

We are currently fixed, but the early exit penalty is a small amount, so we can change our lender if the deal is good.

Offset definitely seems worth pursuing. I am very wary of trackers - I think the base rate can only go in one direction, and I reckon it will start to do so within the next five years, so will probably want to fix. I will take a close look at First Direct too.

Thanks so much!

The downside of offsets as it what explained to me (& it could be totally wrong, I am clueless) is that under the banking insurance rules, only the first £50k of your savings are protocted with each individual institution, and your debts with that same institution are taken into account. For example, if you had a 100k mortgage with Superbank, and all your lifesavings of 40k in their offset account, and they went under, you would not necessarily be protected/get your 40k back.

Fessa when i checked this out if its in a saving account (50k per person) its in savings account and it is protected. so if you have over 100k you would loose out as y ou would with any bank

but what do i know..