Overpaying the mortgage: how does this work?

[Welshbeef]

bogwoppit said:

R60EST said:

I can't understand why everyone does not have such a (offset) mortgage , given the difference in interest paid by the banks and what they charge , irrespective of the base rate , it's got to be the best way to manage your money.

They are convenient, in that they automatically make the best use of your cash to limit the interest you have to pay. But the reason most people don't use them is that the rates are simply not competitive, i.e. you can get a much lower rate on a tracker/fixed/variable. If you want to save money but don't want to spend the time moving money around (i.e. out of your 0% current account), they're a good product. Otherwise, get a cheap mortgage and a good savings account.

Edited by bogwoppit on Wednesday 27th May 18:09

offsets really suit people with irregular income i.e. company directors/contractors/freelance etc.

[King Herald]

bogwoppit said:

However, what I would say is: what you are trying to do is probably monumentally pointless. If you have excess cash now and want to make the most of it, you always use it to pay off the most expensive debt first - you mentioned being bothered by the interest rate on a credit card, I expect the rate is much higher on that than your mortgage. Even if you have no other debts, you will probably still be better off putting the money in savings because the rates are typically higher than mortgage rates. You can get a regular saver at Barclays that pays 6%, or 7% at First Direct if you don't already have an ISA. Just don't spend the cash Head over to moneysavingexpert.com for a full explanation.

I have no credit card, or other debts, only this mortgage. HSBC is currently paying best part of feck all for savings, as are most other places I know of. If Barclays do 6% I shall be paying them a visit as soon as I get home. Even my nationwide BS is paying peanuts.

And ISA is probably no use to me as I don't pay income tax.

[bogwoppit]

I don't pay income tax either (thought there weren't many of us around!) but an ISA is still useful, you just compare the ISA rate to the gross rate of other savings accounts. Plus if you ever end up paying tax on your savings, your rate will drop and you may want to transfer more than £3600 to an ISA. At 7%, First Direct's regular saver is the market leader. You have to switch current accounts to get it, but honestly that's really easy and they are great anyway - you ring up and it's actually a human that answers the phone - shock, horror! Plus they give you £100 for opening the account, and another £100 if you don't like it so close it.

For other savings accounts look at moneysupermarket.com. I think the best easy access accounts are around the 3% mark, which is a bit rubbish, clearly. Still, it's more than my tracker mortgage

[Dave_ST220]

bogwoppit said:

R60EST said:

I can't understand why everyone does not have such a (offset) mortgage , given the difference in interest paid by the banks and what they charge , irrespective of the base rate , it's got to be the best way to manage your money.

They are convenient, in that they automatically make the best use of your cash to limit the interest you have to pay. But the reason most people don't use them is that the rates are simply not competitive, i.e. you can get a much lower rate on a tracker/fixed/variable. If you want to save money but don't want to spend the time moving money around (i.e. out of your 0% current account), they're a good product. Otherwise, get a cheap mortgage and a good savings account.

Edited by bogwoppit on Wednesday 27th May 18:09

????
3.49% not competitive? Best fixed rate deal(long term >5 years) i found was 4.99%. Then take into account most savings accounts are paying bugger all on anything meaningful (+£10K) then it makes no sense to me to fix and leave all my money doing bugger all sat in a bank. So i haven't I'd love to know where i can get a 5 or 10 year fix for 3.49% AND get the same return on savings.

[Welshbeef]

http://www.woolwich.co.uk/mortgages/offset-mortgag...

Please tell me how you think any of those are not competitive?

[pimpin gimp]

bogwoppit said:

I am constantly amazed by how many people overpay on 3% mortgages whilst keeping 6% savings and owing on 20% credit cards, all at the same time. For God's sake, pay off the credit card!

Not quite that simple though is it?

A 3% mortgage over say 20 years on a 150k debt is going to be a shedload more costly than a 20%, or even 50% credit card on a 1k debt over a year.

I would have thought that the term plays a much bigger part than the interest rate.

[King Herald]

pimpin gimp said:

bogwoppit said:

I am constantly amazed by how many people overpay on 3% mortgages whilst keeping 6% savings and owing on 20% credit cards, all at the same time. For God's sake, pay off the credit card!

Not quite that simple though is it?

A 3% mortgage over say 20 years on a 150k debt is going to be a shedload more costly than a 20%, or even 50% credit card on a 1k debt over a year.

I would have thought that the term plays a much bigger part than the interest rate.

I tend to use credit cards as short term loans, and I sometimes leave a grand or so debt on one, for a month or two, even when I have more than that in the bank, as I don't want to use my 'liquid cash' up. And I know that if I take some cash out of my Nationwide BS account to pay it off it won't get put back for ages.

[bogwoppit]

pimpin gimp said:

bogwoppit said:

I am constantly amazed by how many people overpay on 3% mortgages whilst keeping 6% savings and owing on 20% credit cards, all at the same time. For God's sake, pay off the credit card!

Not quite that simple though is it?

A 3% mortgage over say 20 years on a 150k debt is going to be a shedload more costly than a 20%, or even 50% credit card on a 1k debt over a year.

I would have thought that the term plays a much bigger part than the interest rate.

Not trying to be argumentative but I think it's important to understand that this is a very wrong conclusion to reach. You're assuming that the credit card would be magically paid off after a year, but obviously you have to divert some cash to do that. By paying off another debt, no matter how long the term, you are delaying paying off a more expensive debt. To put it another way, the term of a loan is not a factor in how "expensive" it is - it is merely a calculation of when you aim to pay it off.

That said, as King Herald said, it's good to have some savings for a rainy day, but what I was really getting at is that some people do in fact have substantial savings from which they derive income from the interest, but then owe on credit cards at the same time - it's a net loss.

[bogwoppit]

Welshbeef said:

http://www.woolwich.co.uk/mortgages/offset-mortgag...

Please tell me how you think any of those are not competitive?

These certainly seem much better value than when I was looking this time last year, I will grant you. However, remember these offset mortgages are trackers and will go up a large amount before very long. To get Woolwich's best (2.49%) you need a 40% deposit for 350k house. For a 20% deposit, 4.74% for 80% could become crippling! A five year fixed rate might seem comparatively expensive right now, but is likely to end up better than these. But to be fair things just aren't great at the moment so you're right they are competitive.

It's still worth bearing in mind that even if I took out an offset mortgage at 3.49%, it would still make more financial sense to ignore the offset feature and put my spare cash in a high-interest savings account instead. If I'm doing this, the value off the offset feature is very small (probably less than 300 quid over 25 years). BUT the big advantage with offsets are that you don't have to move your money into a savings account for it to be doing something useful. That *might* save you some money, but you'd have to either have a poor savings account or be very lax with moving money. Hence why I say they're convenient. The gain from doing this isn't as great as it was because debt and savings rates have come closer together, but I can't ever imagine the best mortgage rate being lower than the best savings rate so this fact will never change. I'm not bashing offsets at all, in fact I think they're a great idea, I'm merely pointing out that using the offset feature itself is never optimal if you're prepared to do some work.

[Dave_ST220]

I'm prepared to work, Where can i get 3.49% tax free on £50K and access it should i need to? Genuine question btw, not looking for an argument

[Simian Dave]

And my mate has just written a not very specific or useful article about it, but it does kind of show why overpaying is good:
http://www.lovemoney.com/news/mortgages/pay-off-yo...

[Seany88]

Out of interest what does an offset mortgage statement look like? Do they automatically cancel out the borrowing rate with the theoretical interest rate of the money on deposit? Actually I think I know the answer but reason I was asking was for BTL mortgages and such, although I don't know if any offset BTL products are available?

[Welshbeef]

Seany88 said:

Out of interest what does an offset mortgage statement look like? Do they automatically cancel out the borrowing rate with the theoretical interest rate of the money on deposit? Actually I think I know the answer but reason I was asking was for BTL mortgages and such, although I don't know if any offset BTL products are available?

Not yet had mine but I would assume on the summary it would show the balance in each account & therefore total summer up PCM incl the mortgage to give a -ive amount.

I have no idea as to why you'd want an Offset Buy to let? You want that interest amount to stay the sam not reduce so you therefore pay zero interest. You may as well hold the "effective equity" in p bonds/isa's or best place of all in your own residential offset mortgage.

[Simian Dave]

re the statements - depends on who you're with:

I.F. have seperate accounts all with their own numbers, so the statements are split that way - one for the current account, one for the mortgage and any for the savings accounts if you have paper statements (you can view them all sperately online).

The OneAccount is just that - one account, one sort code and one number. You get a statement for that single account. The online tools allow you to partition the massive overdraft up how you want, but really the transaction statement works the same as for any other single current account.

Edit -
re BTL offsets - bad idea:
You can't claim back any interest saved against the rental income so end up paying tax on that slice instead - generally at a higher rate than your BTL mortgage rate.

Edited by Simian Dave on Tuesday 2nd June 14:55

[Seany88]

Welshbeef said:

Seany88 said:

Out of interest what does an offset mortgage statement look like? Do they automatically cancel out the borrowing rate with the theoretical interest rate of the money on deposit? Actually I think I know the answer but reason I was asking was for BTL mortgages and such, although I don't know if any offset BTL products are available?

Not yet had mine but I would assume on the summary it would show the balance in each account & therefore total summer up PCM incl the mortgage to give a -ive amount.

I have no idea as to why you'd want an Offset Buy to let? You want that interest amount to stay the sam not reduce so you therefore pay zero interest. You may as well hold the "effective equity" in p bonds/isa's or best place of all in your own residential offset mortgage.

Yes of course, put as little capital in as possible but then in the current economic conditions, if your savings can't find a better place to be that'll give 5% interest or so wouldn't that be more beneficial?

And Simian Dave, if they're separate accounts then surely the interest saved could be documented and therefore put against the tax due?

[Simian Dave]

Nope - you haven't had the expense, so you can't claim it (we've tried).

From HMRC's point of view:
You have an income of X, expenses of Y.
Z equals X minus Y.
You pay tax on Z (ish).

If you have chosen to reduce your overall expenses you have a bigger Z, so pay more in tax.
You are aiming for a higher Y to reduce the Z so the tax burden is lower.
Actually you are aiming to maximise the useful parts of Y and minimse the 'wastage' part of Y... Reducing the amout of interest you pay on a mortgage may seem like a good idea - you don't want a high interest payment, it custs into gross profits - but you do want other, useful, expenses to eat up that saving so you don't end up paying income or corporation tax on it.

[Seany88]

Ahh ok thanks for explaining...thought there'd be a technicality somewhere. Do you own property yourself? What do you do to minimise the tax liability? I know businesses would invest in improvements and maybe machinery etc, what can a landlord do? Buy another house?

[Horse_Apple]

King Herald said:

I'm overpaying by £200 a month, but after some 15 months of that we are still paying exactly the same amount each month, whereas I was expecting to see it recalculated as the capitol shrank. I went to the bank, spoke to the C&G chappie, who didn't appear to know any more about it than I did, and he said the mortgage just gets shorter, paid off earlier, rather than decreases the monthly bill.

I meant to phone them up, see if I could get more sense out of a phone bod, but forgot, and now I'm offshore so I throw the problem to the great minds of PH.

Basically, I don't want to be better off by £600 a month in a far distant 16 years time, I'd rather save it now, pay less out each month, by paying more, see some results for my extra input, if that makes sense.

Mortgage is 5%, fixed for four more years.

With the C&G fix you can doing the following:

Overpay every month up to the value of the interest element of the monthly payment.

Once a year, pay off up to 10% of the oustanding loan.

If you make monthly overpayments then instead of reducing the overall monthly cost it will simply accelerate the time to expiry/completion.

If you make a one off payment and specify it as such then they will re-calculate/re-base the ongoing monthly payments to reflect this.

[King Herald]

Horse_Apple said:

King Herald said:

I'm overpaying by £200 a month, but after some 15 months of that we are still paying exactly the same amount each month, whereas I was expecting to see it recalculated as the capitol shrank. I went to the bank, spoke to the C&G chappie, who didn't appear to know any more about it than I did, and he said the mortgage just gets shorter, paid off earlier, rather than decreases the monthly bill.

I meant to phone them up, see if I could get more sense out of a phone bod, but forgot, and now I'm offshore so I throw the problem to the great minds of PH.

Basically, I don't want to be better off by £600 a month in a far distant 16 years time, I'd rather save it now, pay less out each month, by paying more, see some results for my extra input, if that makes sense.

Mortgage is 5%, fixed for four more years.

With the C&G fix you can doing the following:

Overpay every month up to the value of the interest element of the monthly payment.

Once a year, pay off up to 10% of the oustanding loan.

If you make monthly overpayments then instead of reducing the overall monthly cost it will simply accelerate the time to expiry/completion.

If you make a one off payment and specify it as such then they will re-calculate/re-base the ongoing monthly payments to reflect this.

Ahh, that sounds more like it. I will see about making an extra annual lump sum payment instead of just the monthly one I reckon, so it at least feels like I'm making headway. Thanks.

[Horse_Apple]

King Herald said:

Horse_Apple said:

King Herald said:

I'm overpaying by £200 a month, but after some 15 months of that we are still paying exactly the same amount each month, whereas I was expecting to see it recalculated as the capitol shrank. I went to the bank, spoke to the C&G chappie, who didn't appear to know any more about it than I did, and he said the mortgage just gets shorter, paid off earlier, rather than decreases the monthly bill.

I meant to phone them up, see if I could get more sense out of a phone bod, but forgot, and now I'm offshore so I throw the problem to the great minds of PH.

Basically, I don't want to be better off by £600 a month in a far distant 16 years time, I'd rather save it now, pay less out each month, by paying more, see some results for my extra input, if that makes sense.

Mortgage is 5%, fixed for four more years.

With the C&G fix you can doing the following:

Overpay every month up to the value of the interest element of the monthly payment.

Once a year, pay off up to 10% of the oustanding loan.

If you make monthly overpayments then instead of reducing the overall monthly cost it will simply accelerate the time to expiry/completion.

If you make a one off payment and specify it as such then they will re-calculate/re-base the ongoing monthly payments to reflect this.

Ahh, that sounds more like it. I will see about making an extra annual lump sum payment instead of just the monthly one I reckon, so it at least feels like I'm making headway. Thanks.

But, the joy of making the monthly overpayments is that if your circumstances change then you can control the finance, if you go and stick £20K in one hit just to get a fractionally lower monthly rate then you are unlikely to be able to gain access to those funds should the need arise.

The C&G interest only fix is one of the best products out there as it gives you total control of the capital payback each month plus the option of a significant one-off top up each year.

It's the next best thing to an offset which seems hard to find at present.