Mortgage question...

Our mortgage was an offset product with Intelligent Finance bank. It's an Internet based bank owned by HBOS (I think). With an offset mortgage they set your repayment rate assuming you have no savings. For example, with a £100k mortgage with a repayment amount of £500 per month that £500 pays of some capital and interest. If you have £10k of savings then you effectively owe £90k. Instead of that reducing your monthly payment to £450 (made up numbers for illustration only) they still take £500 but the extra £50 pays off the capital - which has the knock on effect of reducing your interest even further. This is where the snowball effect can kick in.

The product we had was very flexible. Our lender permitted us to overpay at any time. So we could pay off lump sums or increase the monthly payment - e.g. to £600. That, coupled with savings, meant even more capital got paid off each month.

This particular lender did not charge any penalties for overpayments - which is typical of offset mortgages. We managed all monthly payments and one-off payments online.

If you want to make overpayments to your mortgage, check with your lender that there would be no charges associated - chances are good that they wouldn't, they only usually charge if you fully repay early. If you bank online you may be able to do it that way, otherwise rock up to a branch and hand them a cheque, as you say. A better way to do it would be to see if you could arrange for your monthly payment to be increased so that more pays off the capital each month. Speak to your lender. Reducing capital now, by overpaying, whilst interest rates are so low is one of the best things you could do with your money right now - if you're in the position to do it.

 

Sounds like a good plan - get one from a provider that's flexible in managing repayments.

The other benefit of offsetting is that it's like making an overpayment based on your savings, but you still have access to your savings if you need them. Which in these torrid times is a prudent move.

 

If & when you do hand a cheque over, make sure you specify that is to be paid off the Capital, i was in the fortunate position of being able to do this,but only twice per year without penalty,on a repayment mortgage,& was advised at the time to specify that i wanted to pay it off the capital & not the interest, if that makes sense !!

 

I was a commercial banker for several years until fairly recently and can tell you that getting a loan approved is not always as straightforward as you might think. I certainly earned my arrangement fees when I was doing it.

I do have an issue with charging arrangement fees on straight-forward retail (personal) mortgages because you pretty much qualify or you don't. However, a loan for a company is not at all straight forward because you don't have personal credit history to go on (credit ratings). There is an incredible amount of analysis required in terms of the company's financial performance, who the principals of the company are, what the security (collateral) is etc to determine whether or not to submit an application for funding to senior lending officers. It could take me 20 hours or so to produce a report (+ client meeting time) and then a few more hours in discussion with Lending officials. I take offence at the "robbing barsteward bankers" mentality. I was just doing an honest day's work.

 

Agree 100% - best decision we ever made. You've described our situation exactly. We also took out a 21 year offset mortgage with Intelligent Finance in 2002, and had some savings at the time which we put into savings accounts with them that form part of the plan. Any offset plan is a comnbination of a mortgage account, a current account and any number of savings accounts with the same provider that are all linked together. We also started overpaying, not by much at first, but a little bit more each month / year as time has gone on and salaries went up, and now overpay by quite a bit each month. We are now in a position (for the last 2 years) where the savings balance matches the outstanding mortgage so although the full monthly payment comes out each month they don't add any interest at all to our balance now and the full monthly payment comes straight off the balance, plus any overpayments. For the last 10 years we have not earned a penny on our savings because it has all offset our mortgage but we have worked out that we will have paid off the mortgage completely in another 21 months time, 9 years early. That will save us thousands of pounds in the long run. I would recommend an offset mortgage to anyone - they are the most flexible type of mortgage you can get.

On the Intelligent Finance web site, they calculate and show you both the cumulative interest to date saved by offsetting plus the total overpayments you have made, just to give you a rosy glow

 

Bloody shame they've closed their doors to any new customers. It's the way banks should be run in my opinion.

 

Think they closed their doors to new mortgage customers because they became the savings arm of HBOS, and mortgages are offered only by either Halifax itself or, I think, Cheltenham and Gloucester, which are all part of HBOS as well. So C&G should offer the same kind of thing as IF used to do. Otherwise, I think the Yorkshire BS has always done a very flexible offset mortgage.

Offsets are one of the very few financial products that always work in favour of the customer - very rare breed indeed. The only flaw I can think of is that, by definition the mortgage is on standard variable rate, so if being on SVR is not for you then neither is an offset. But as others have said, the SVR is not likely to move upwards any time soon, and with interest rates being so low on savings accounts, now would be a very good time to use an offset.

 

First Direct also do offset mortgages. That's where I would probably go now if I wanted to get one.

http://mortgages.firstdirect.com/offset-mortgage-calculator

 

Can I just ask your recommendation on this again then please (I feel like I am getting a touch more knowledge on the matter now, but learning all the time thanks to this thread). We've already established that my first ever (3 yr) fixed rate is coming to an end that was 5.99% I believe - I think that now I shall automatically move onto their 4.95% variable rate. Am I correct so far? This will result in a saving of around £50 p/m come January 13. Is this rate likely to stay the same then for some time? And instead of moving onto a 2 year fixed rate at 4.99% and then paying a £499 arrangement fee, would you advise to stay on the variable rate for the next couple of years or so (unless the variable rate jumps during this period)?

 

Hi Googs. It is very hard to recommend for certain - it very much depends on your cirsumstances. If it was me, I would stay on the variable rate because it is unlikely that the variable rate is going to go up much soon, if at all. The bank of England base rate, on which standard variable rates are supposed to be based, hasn't moved an inch now in more than 3 years and it is hard to envisage that it will this side of 2014.

There have been one or two banks that have put 0.25% on their variable rate recently, even though the bank of England rate has not changed, simply to screw a few more pennies out of their customers. But without a movement in the base rate, this cannot kepp happening otherwise banks would make themselves uncompetitive with others who have chosen not to do so.

The fixed rate you have and the SVR are virtually identical so at face value, assuming the variable rate stays the same, you will be £500 worse off in 2 years on the fixed rate because of the arrangement fee. You have said that your old rate of 5.99%, which is 1% higher than the variable rate, cost you £50 more a month. So, roughly speaking, the variable rate would have to rise by 1% above where it is now for more than 10 months out of those 2 years, for you to be worse off on the variable rate. Given that rate rises normally happen in 0.25% chunks, it is very unlikely that there will be 4 or more of those in the next year.

The final decision lays with you because it depends on personal factors. i.e. how risk averse are you and how exposed do you feel to a rise. For example, if a decent rise in the variable rate would mean that you would be pissed off but you could cope then stay on the variable rate. If you are so hocked up to your eyeballs that a decent rise in the variable rate would tip you over the edge into bankrupcy and repossession then, unlikely as it is that the rate will rise to that extent, it may still be a risk you can't take.

Remember that, if you stay on the variable rate, but keep your eye on the rate and if it goes up start asking questions about whether this is a one off or a trend that will keep gong upwards, it means that you can change your mind later and look for a fixed rate for peace of mind if things start looking dodgy.

Hope that helps.

 

Bloody brilliant that mate!! Worded fantastically enough for a thicko like me to understand!

So, again we've now established that come January, i'll be paying off £50 per month less than I currently am. I have 22 years remaining as it stands. Could I ring my bank, and ask them to knock say a couple of years off, taking me down to 20 years, and pay nearer to what I am currently paying? And if like you say, things get dicey further down the line, could I join a fixed rate whenever I wanted?

Thank you very much for all this advice, you are all stars!

 

I won't add too much to an excellent thread however one thing to remember if you do (as I would) sit on the standard variable rate is, you can always go in and fix at anytime if rates do rise, you hold the aces right now as they say

 

Thanks mate Just the answer I was looking - and hoping - for.

 

Surely you can get better rates? We started on ours on a tracker 3.79% above base rate with 999 fee for 3 years. Just renewed on tracker 3.99% above, no fee I believe (our lass did the phoning). Base rate isn't moving so its as good as a fixed.

 

Take the opportunity to look around and see what deal you can get. I'm sure you can get a better rate than 4.95%.

It's well worth doing a little research into these financial subject matters. Gaining a little knowledge can help save a lot of money in the long run. Don't be afraid to ask questions and make sure you understand the responses. It's really not as complicated as you might imagine - it's just the financial services sector that would like to convince you that it is complicated and that these matters are best left to them. You can guess why.

There are lots of online resources out there that can help. They also have forums where people are very helpful.

First port of call would be http://www.lovemoney.com There's a mortgage comparison bit and a section that offers advice on remortgaging.

Another useful resource is their sister site - the Motley Fool http://www.fool.co.uk - which is more geared towards investing and pensions.

If you decide to switch lenders make sure you understand what charges will be applied by your current lender (because you will be fully repaying the mortgage and this may attract an early redemption penalty) and what fees might be applied by your new lender. Factor these extra costs in when making comparisons.

Best of luck.

 

If you've got over 20k in savings look at an offset mortgage, will save you thousands in interest payments and will cut your mortgage by years the more savings you have. Im in the process of moving onto one now.

 

You're welcome.

I am not sure about this - that sounds like it would be treated as a re-mortgage to me. Obviously a re-mortgage is an option even with the same bank, but you would have to go through all the same process and formality as if you were switching your mortgage to a new provider. However, if you are on a mortgage that has the flexibility to overpay without penalties then it may be worth just doing that, either once a year, or every month depending on what you are allowed to do. This is one of the scenarios where, as mentioned earlier, an offset mortgage can really be beneficial, if you know that you could be in a position to overpay either now or in the future, as they are completely flexible and you can overpay at any time just like doing a bank transfer on the web. A lot of standard mortgages only let you overpay at set times, or a number of times a year etc - you would need to check the terms of your current mortgage.

One nice creative approach with an offset is that you can put the money you would be over paying into the savings account part of your offset plan instead, and the interest you pay is then reduced as if you had actually overpaid the mortgage, but you haven't - you've just put the money in savings and you could still get your hands on it whenever you needed to. Best of both worlds

As others have said, check around for deals as you may get a better standsard variable rate, but always take the fees into account. You should be fine though on the standard variable rate if you are talking about using the extra £50 to overpay, as you obviously can therefore afford to keep paying at that rate - so one option would be to put the £50 into savings each month to be used to cushion the blow if rates rise above the level you are comfortable with - every month that they don't rise at all and you have put £50 away is another month that you could afford a 0.5% rise if they do go up. Further down the line, when you are comfortable that you don't need to keep hold of the buffer, just use it to make a one off overpayment.

Yes, no problem, but remember that the fixed rate deals on offer further down the line will depend on where the base rate is at that point and what the trend is looking like for its upward movement in the future. i.e. banks are offering you 4.95% fixed at the moment, but if, in 18 months the variable rate has gone up twice by a total of 0.5%, and all the predictions by that stage are that it will keep going up, then banks will by that stage be offering fixed deals at 5.5% at the least, but most probably higher. The trick is to move quickly if you start to feel nervous, but at the moment, financial watchers are all suggesting the base rate will not change for another 2 years at least. They can all be wrong of course but bear in mind that in an ideal world, the bank of England would have brought it down even further in the last year to help the economy, but as the base rate is only at 0.5% anyway, it can't really come down any further, which is why the BoE have been chucking money into the economy using this "quantitive easing" trick instead to try and keep it moving.

The key to feeling confident that the rate is not likely to change is that the fixed deal you are being offered is exactly the same as the current variable rate - banks are not in the habit of losing money, so if they thought that the rate was going to go up the fixed rate they would be offering would be higher than the current variable rate, so that they would be building some slack in to allow rates to actually go up a bit before they start losing money on your mortgage.

Hope that helps