What's the difference between an offset mortgage and one in which you simply overpay? And other questions

I'm looking around for remortgaging deals having finished my "Charcol insipred" Woolwich discounted variable rate. I tend to have a large amount of money (typically about what I spend on the mortgage, so effectively I could double my mortgage spend) after the end of the month, so I was thinking of putting this to good use by overpaying.

Are there any resources which would give me a guide as to whether this is even a good idea or not, compared to sticking it in a high interest account? Naturally this depends on tax etc, I'm a higher rate tax payer.

What would be the benefit of going for a full merged account (or offset, I believe there are differences) over a "normal" account and just overpaying?

The other thing is that I currently have an interest only mortgage, I'd like to continue that style if possible.

I was thinking of doing this research and if necessary using this in preparation for talking to my long standing IFA.

Ta, Dan

Reply to
Dan Gravell
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I have an interest only mortgage and make the odd overpayment when I have a bit of spare cash, but the difference must be that I can't get any of that overpayment back in case of a "rainy day" whereas if I had the offset savings/loan deal then it could be drawn up on if need be, but then there's the temptation to spend it on non essential things, so it might not be such a good idea.

First Direct seem desperate for me to have their offset mortgage judging by the huge amount of junk mail they send me promoting it!

Reply to
Adrian Boliston

Bitstring , from the wonderful person Dan Gravell said

You just need to know how much interest £1000 overpaid on your mortgage saves you, vs how much (net) you'd get if you put £1000 in the best savings a/c you can find (currently 4.5% gross, with ING, probably).

If you are a higher rate tax payer, you almost certainly do better not paying interest than you do earning it. However you need to check the rates on 'merged accounts' .. i.e. if they're going to charge you 7% for your 200k mortgage vs 6% for a 'normal' mortgage, you're never going to make up the difference (2k/year) by saying 'whee, I made £10 more by paying off some mortgage than I would have by saving with ING.

You can get the overpayment back out again with a merged account. To do that with a normal account probably involves copious negotiations with the lender.

Then you have a problem if you want to get the overpayment out .. they're going to expect you to pay at least the interest, and there is no facility for paying less, and certainly none for saying 'I want that £1k I over-paid last month back again, please send me a cheque'.

Reply to
GSV Three Minds in a Can

Yes, it is a good idea. Assuming the mortgage in question is for your own home, as opposed to a buy-to-let, the effect of paying a pound off your (say 6%) mortgage is to save you 6p of real (after-tax) money in loan interest each year. But the effect of putting a pound into a high-interest account (at say 5%) is to give you only 3p a year after tax. There is simply no contest.

There may be limits to how often or how much a normal account will let you pay off, but that apart, it's likely to be better than offset accounts because the interest rate on offset accounts tends to be rigged so as to cost you more. The same is probably true of "flexible" accounts, where you can take the overpayments back out again at the drop of a hat when that Ferrari beckons.

That's OK, but it means that any overpayments will be sporadic and be initiated by you each time. If you have regular spare cash, it may reduce your (and your lender's) administrative burden if you simply changed to a repayment model, with the term length tuned to give just the right level of monthly overpayment.

Reply to
Ronald Raygun

Thanks for your informative reply.

Yeah - in many ways this is what I want to hear, because to me the work involved in signing up to one of these new fangled offset things, changing current account etc, would make it all a bit of a bind. A standard "flexible" deal would be better but as you say I may be paying a premium once again. I think this is a case where I need to scour the details for each product.

I had a chat with my current lender about my current product and they said I could just set up a standing over with the overpayment. The extra figure above the interest would bite into the outstanding debt.

I guess I also need to watch out that the interest is calculated daily (as this would make a bit of a nonsense of regular overpayments otherwise). Would the interest paid come down each month too?

Dan

Reply to
Dan Gravell

Thanks for the reply

I'm not that bothered, at this moment in time, about reclaiming previous overpayments. I am financially disciplined, but I see such constraints as a help in many ways.

But I say "at this moment" because I guess, if I got a discounted flexible product and overpaid, I could remortgage when the discount period ended switching to an account that allowed reclamations if I saw something afoot in the medium term.

Although I guess these things aren't always visible in the medium term ;)

Dan

Reply to
Dan Gravell

Quite.

It should do, but that doesn't necessarily mean the payment requested comes down, since many lenders revise the amounts requested less frequently, though the excess would just reduce the capital instead.

Reply to
Ronald Raygun

Of course. Something to double check though.

Thanks, Dan

Reply to
Dan Gravell

I've got an interest only mortgage with Nationwide and I can get my overpayments back whenever I want, or take payment holidays till my "overpayment reserve" is used up.

Reply to
Andy Pandy

A lot of remortgage deals limit the amount (or ban) overpayments, so if you want to overpay you may not get as good a rate. I found Nationwide's tracker a good compromise, 0.01% below the BOE rate for 2 years and they allow overpayments up to 500 a month. And you can withdraw overpayments whenever you want.

In general it is daft to have savings on which you pay tax (esp higher rate) at the same time as a debt (like a mortgage) on which you don't get tax relief. There are exceptions though, eg if you get a good 2 year deal which doesn't allow overpayments during the term, but does afterwards, it may be better to save for two years and then plough your savings into your mortgage.

If you want instant access to your overpayments go for offset. If you don't mind waiting a week or so you could go for a flexible mortgage (eg Nationwide). If you don't think you'll need the overpayments back then just overpay, if you do need the money back you'll have to remortgage which could take a while and be a hassle (or not even possible if house prices crash).

A disadvantage of offsetting (compared with flexible mortgages or simply overpaying a normal mortgage) which hardly ever seems to get a mention is the effect on benefits. If you lose your job but have savings you may not be able to get benefits. If you have no savings because you've used all your spare cash to overpay your mortgage, you shouldn't be disqualified from means tested benefits (equity in your house doesn't count). You may even be able to withdraw overpayments to top up your benefits! (although this could reduce your benefits depending on the interpretation of the benefit rules).

Reply to
Andy Pandy

Bitstring , from the wonderful person Andy Pandy said

Good for them, but that's not standard afaik. When you say you can 'get them back', will they actually send you a cheque?

Reply to
GSV Three Minds in a Can

Isn't it? I have a couple of "flexible reserve" interest-only BTL mortgage loans from Legal & General (now operated by Northern Rock). They work precisely the same way. You can overpay, and get the overpayments back, or take payment holidays. I've never actually overpaid (yet, though I plan to "overpay" one to the minimum balance soon, when I sell the property associated with the other one), so I've not had the occasion to borrow-back.

Possibly, but I'd've thought they'd just transfer the money straight to your bank account.

Reply to
Ronald Raygun

Yup,

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Applies to interest only and repayment mortgages, but I guess with a repayment mortgage the repayment part of your normal monthly payment won't count towards the overpayment reserve, only payments on top of this. Which is why I went for an interest only mortgage, I treat it as a repayment mortgage where I decide how much and when to repay.

Reply to
Andy Pandy

You're *so* shrewd.

Reply to
Ronald Raygun

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