Calculating the effect of an offset mortgage?

[eltax91]

Hi guys

Just got into a new offset mortgage. It has a fixed rate of 1.89% for 2 years, then jumps to standard variable.

I have £142k total loaned, and I have just over £50k sat in the offset as capital. Mortgage monthly payment is £918 a month.

At the moment, the online system shows a mortgage benefit of £53 a month and currently zero affect in terms of "term reduction".

When we signed up, our IFA suggested to us that as savers, an offset could significantly affect our terms and put us in a sound financial position with regards the mortgage. I've also generally always been led to believe that "most" of a monthly mortgage payment is in servicing interest and that your debt only reduces slightly each month. So, i'm questioning the figures really. With over 1/3 of the total mortgage in the offset, should I be seeing a significant "benefit" in the term reduction? Any way I can calculate what the benefit should be manually to cross check the figures?

Thanks

[Sarnie]

eltax91 said:

Hi guys

Just got into a new offset mortgage. It has a fixed rate of 1.89% for 2 years, then jumps to standard variable.

I have £142k total loaned, and I have just over £50k sat in the offset as capital. Mortgage monthly payment is £918 a month.

At the moment, the online system shows a mortgage benefit of £53 a month and currently zero affect in terms of "term reduction".

When we signed up, our IFA suggested to us that as savers, an offset could significantly affect our terms and put us in a sound financial position with regards the mortgage. I've also generally always been led to believe that "most" of a monthly mortgage payment is in servicing interest and that your debt only reduces slightly each month. So, i'm questioning the figures really. With over 1/3 of the total mortgage in the offset, should I be seeing a significant "benefit" in the term reduction? Any way I can calculate what the benefit should be manually to cross check the figures?

Thanks

What has the lender said?

[eltax91]

Sarnie said:

eltax91 said:

Hi guys

Just got into a new offset mortgage. It has a fixed rate of 1.89% for 2 years, then jumps to standard variable.

I have £142k total loaned, and I have just over £50k sat in the offset as capital. Mortgage monthly payment is £918 a month.

At the moment, the online system shows a mortgage benefit of £53 a month and currently zero affect in terms of "term reduction".

When we signed up, our IFA suggested to us that as savers, an offset could significantly affect our terms and put us in a sound financial position with regards the mortgage. I've also generally always been led to believe that "most" of a monthly mortgage payment is in servicing interest and that your debt only reduces slightly each month. So, i'm questioning the figures really. With over 1/3 of the total mortgage in the offset, should I be seeing a significant "benefit" in the term reduction? Any way I can calculate what the benefit should be manually to cross check the figures?

Thanks

What has the lender said?

Nothing yet! I'm asking the internet of geniuses first. Also I'm a man, I don't like actually talking to people.

[walm]

eltax91 said:

Nothing yet! I'm asking the internet of geniuses first, I'm a man, I don't like actually talking to people.

Ha! Good point.

A couple of things.
Firstly that £53 appears low.

Consider just an interest only mortgage for a moment.
You should be getting a discount of £79 per month minimum. (£50k x 1.89% /12.)

Regarding the term - it depends surely on how you have set up the payments.
If you just keep paying the same every month, then indeed the term should reduce since you don't really owe as much interest and hence more of your monthly payment is going on principal rather than interest.

It seems unlikely you have that arrangement.
More likely is a flexible direct debit that simply credits your monthly payment by the offset interest.

Again consider interest only - the interest bit is £224 and £50k offsets £79 so you just pay £145 a month, but HERE the term doesn't change. Since the amount of principal you are paying remains static (at ZERO!).

So - has the £50k been in the account the whole month?
Is £53 really the whole month estimate or just MONTH TO DATE or something?

[eltax91]

Thanks for the reply. And for helping with calculations. When we got into the mortgage, we said we wanted to pay the same fixed monthly payment and any variation was to go into the capital each month and pay extra off the mortgage.

I will give it a couple of weeks more and then contact them if the numbers don't change. I've only had one payment so far, the £53k has been there since day 3 (it took 3 days to transfer it all across due to transfer limits)

[DeaconFrost]

The offset I have has three options - a yearly reduction in payment based on the offset savings amount you have, a monthly reduction in payment based on the savings or a reduction in term. You have to choose which one to be on though. If you're is the same maybe you're not on the term reduction one?

[russ_a]

I would have thought an offset mortgage is pointless at 1.89%. Can't you take the 50k and get a saving rate greater than that?

[GT03ROB]

russ_a said:

I would have thought an offset mortgage is pointless at 1.89%. Can't you take the 50k and get a saving rate greater than that?

May depend on his marginal tax rate.

[williaa68]

Australia has had offsets for years - i first heard about them when i lived down there. Try this calculator which gives various options:

http://www.ingdirect.com.au/home-loans/calculators...

I use mine, which is with first direct, like a line of credit. I am currently about 2/3 offset as I am waiting to use some of the funds for another investment but that's been as low as 10% and up to 90% in the last 2 years. I think they are great!

I cant imagine you can find anything that is risk free and pays 1.9% instant access after tax.