Mortgage Types - What would you choose and why? POLL

[Pig]

Mortgage Types

 

Offset - A method of money management whereby the credit balances held in your current and/or savings accounts can be used to reduce the amount of the mortgage on which interest is charged. This can potentially reduce the total amount of interest paid and allow the mortgage to be repaid more quickly.

 

Discounted - An interest rate set at an amount 'discounted' below the lender's standard rate. This will only apply for a set period.

 

Fixed - The mortgage repayments and interest rates are fixed from the start of the mortgage. The interest rate will remain the same regardless of the movement in interest rates.

 

Capped - A capped rate mortgage is a variable rate mortgage, which is capped to ensure the rate does not exceed a certain limit.

 

Tracker - The interest rate follows the market rate (for example, Bank of England Base Rate or LIBOR) plus or minus a certain margin.

 

Variable - The mortgage repayments and interest rates may increase or decrease throughout the term of the mortgage depending on the market rate (for example, Bank of England Base Rate or LIBOR).

 

I dont understand the difference between Tracker and Variable.

 

And have no F'ing idea about the first one, does it mean if you leave the value of your property in an account then rates are massivly reduced?

[DaveK]

For offset - if you had the value of your property in an account, then you would pay no interest, because you wouldn't have a mortgage balance. You're only ever paying interest on :

 

Mortgage balance - (current account + savings accounts)

 

Interest rates are usually higher on those accounts to start with though. I'd seriously consider one of those if I had a mortgage again though.

[SimonB]

And have no F'ing idea about the first one, does it mean if you leave the value of your property in an account then rates are massivly reduced?

 

No, it means that the interest on your mortgage is calculated daily based on the amount you owe minus whatever you have in your account. So if you had a £110000 mortgage and £1000 in your account you only pay interest on 110000-1000=109000. Your monthly payment stays the same (usually), so you actually repay more of your mortgage each month that you would have without the offset. That in turn means the amount you pay interest on the next month is a bit less. It's as if you get interest on whatever is in your account at whatever the mortgage rate is, tax free, and then use that to overpay your mortgage.

 

The way to get the best out of them is to set things up so you are paid at one end of the month (the 27th say) and all your bills etc come out as far after that as you can (e.g. 24th of the next month say). That way your salary is sitting in ypur account offsetting your mortgage for as long as possible.

 

I think fixed rates are pretty much all you can get at the moment anyway!

[SimonB]

For offset - if you had the value of your property in an account, then you would pay no interest, because you wouldn't have a mortgage balance. You're only ever paying interest on :

 

Mortgage balance - (current account + savings accounts)

 

Interest rates are usually higher on those accounts to start with though. I'd seriously consider one of those if I had a mortgage again though.

 

Beat me to it! When I remortgaged recently the rate was the same for the offset tracker and the normal tracker, but the offset was £600 more arrangement fee.

[Pig]

For offset - if you had the value of your property in an account, then you would pay no interest, because you wouldn't have a mortgage balance. You're only ever paying interest on :

 

Mortgage balance - (current account + savings accounts)

 

Interest rates are usually higher on those accounts to start with though. I'd seriously consider one of those if I had a mortgage again though.

 

I still dont understand.

So lets say i need a £100K mortgage and i have £100K in a bank.

What do i and dont i do??

 

sorry to be so dense.

[DaveK]

I still dont understand.

So lets say i need a £100K mortgage and i have £100K in a bank.

What do i and dont i do??

 

sorry to be so dense.

 

Assuming you took £100k mortgage and still had £100k in the bank (odd thing to do!) you'd effectively have an interest free mortgage. I'm not sure the bank lending to you would like that though.

[RiceRocket]

I'd select 25yr fixed rate.

[Pig]

Assuming you took £100k mortgage and still had £100k in the bank (odd thing to do!) you'd effectively have an interest free mortgage. I'm not sure the bank lending to you would like that though.

 

Still sticking with this assumption.... would the money that is being offset against the mortgage still gather its own interest or does the bank get that?

[sarjo]

FIXED - preferably for five years. At least if you can afford the payments now and nothing drastic changes, you know you aren't going to lose your house.

[Pabs]

I went fixed last year, at between 5-5.5%... fixed for 5yrs too.

 

In a way, a little gutted the house prices/interest rates have dropped. However, I'm very happy that I still know how much money I have going out each month, it's not going to change, and I can manage everything easily. I could afford the mortgage a year ago, and I still can now.

 

Depends if you want to take a risk or not. Nobody can guarantee what's going to happen over the next few years, but I think it's pretty certain that houses/interest rates WILL go back up. (the hard part is working out when!)

[AndrewOW]

I voted for fixed, as it will be very cheap for as long as you have fixed, but be prepared for a shock if the interest rates return to relative normal, in say, 5 years.

 

Once my fixed term ends in March, I will be leaving it to go back to variable rates, but changing it to a repayment mortgage, just to take advantage of the cheap interest to pay a little off the capital while I can.

 

Maybe it would be wise to see an independent financial adviser, as it does take the worry about the choices you do have.

 

My advice is, to choose something that gets your capital down as quickly as possible, but as reasonably close to the current rates at the time.

 

You could always fix again later down the line. Probably

[DaveK]

Still sticking with this assumption.... would the money that is being offset against the mortgage still gather its own interest or does the bank get that?

 

It doesn't exactly accrue it's own interest - no interest would be added to your savings account. It's reducing the interest you pay on your mortgage - so although no interest would be added to your £100K savings account, you are effectively earning interest on it at whatever rate your mortgage is. And since mortgages are typically higher interest than savings accounts - it's better than it earning it's own interest.

 

There are two ways of looking at this, but they are basically the same thing :

 

View one :

 

1) Mortgage is £100K

2) £100K savings

3) Mortgage - savings = £0

4) £0 x whatever percentage = 0. You pay no interest (but your savings doesn't accrue interest)

 

View two :

 

Let's say you borrow £100k and your mortgage interest rate is 4%.

You have £100k savings and a typical / normal savings account gives you 3%.

Without an offset mortgage, your savings have 3% interest added to them each day / month, and you pay 4% interest on your mortgage each month.

With an offset mortgage, your savings account is really earning 4%, but you never see it - the bank magically transfers it to your mortgage account - and since it's exactly the same as the interest on your mortgage you don't owe them any interest.

That £100k is earning interest - but it just goes directly to your mortgage.

[Pig]

It doesn't exactly accrue it's own interest - no interest would be added to your savings account. It's reducing the interest you pay on your mortgage - so although no interest would be added to your £100K savings account, you are effectively earning interest on it at whatever rate your mortgage is. And since mortgages are typically higher interest than savings accounts - it's better than it earning it's own interest.

 

There are two ways of looking at this, but they are basically the same thing :

 

View one :

 

1) Mortgage is £100K

2) £100K savings

3) Mortgage - savings = £0

4) £0 x whatever percentage = 0. You pay no interest (but your savings doesn't accrue interest)

 

View two :

 

Let's say you borrow £100k and your mortgage interest rate is 4%.

You have £100k savings and a typical / normal savings account gives you 3%.

Without an offset mortgage, your savings have 3% interest added to them each day / month, and you pay 4% interest on your mortgage each month.

With an offset mortgage, your savings account is really earning 4%, but you never see it - the bank magically transfers it to your mortgage account - and since it's exactly the same as the interest on your mortgage you don't owe them any interest.

That £100k is earning interest - but it just goes directly to your mortgage.

 

Im must say, thank you.

 

That is fantastically explained and I now understand perfectly. you are very kind to have taken the time.

Jon

[Wez]

FIXED, although at the moment I wish I was on a tracker or variable, my fixed term comes to an end in about 13 months.

[DaveK]

Im must say, thank you.

 

That is fantastically explained and I now understand perfectly. you are very kind to have taken the time.

Jon

 

When I posted it, I was fairly sure it was completely confusing! I'm glad it made sense.

[Wez]

It doesn't exactly accrue it's own interest - no interest would be added to your savings account. It's reducing the interest you pay on your mortgage - so although no interest would be added to your £100K savings account, you are effectively earning interest on it at whatever rate your mortgage is. And since mortgages are typically higher interest than savings accounts - it's better than it earning it's own interest.

 

There are two ways of looking at this, but they are basically the same thing :

 

View one :

 

1) Mortgage is £100K

2) £100K savings

3) Mortgage - savings = £0

4) £0 x whatever percentage = 0. You pay no interest (but your savings doesn't accrue interest)

 

View two :

 

Let's say you borrow £100k and your mortgage interest rate is 4%.

You have £100k savings and a typical / normal savings account gives you 3%.

Without an offset mortgage, your savings have 3% interest added to them each day / month, and you pay 4% interest on your mortgage each month.

With an offset mortgage, your savings account is really earning 4%, but you never see it - the bank magically transfers it to your mortgage account - and since it's exactly the same as the interest on your mortgage you don't owe them any interest.

That £100k is earning interest - but it just goes directly to your mortgage.

 

Nice write up

[Supragal]

Ahh isn't Dave lovely

[Branners]

I have a concept problem with offset. It would feel like I never had any money, it was always just in there trying to pay off the mortgage. I know it isnt like that, but to me it would seem that way.

 

I prefer a fixed rate, and as Im on a standard variable I think I will go that way. The problem is which bank to trust..

[DaveK]

I have a concept problem with offset. It would feel like I never had any money, it was always just in there trying to pay off the mortgage. I know if isnt like that, but to me it would seem that way.

 

I prefer a fixed rate, and as Im on a standard variable I think I will go that way. The problem is which bank to trust..

 

Actually, I do know exactly what you mean by this. I looked into changing my mortgage to offset several years ago, and it did cross my mind that whenever I wanted to use any of my savings it would almost be like I was increasing my mortgage to buy things. It did make me feel a bit uneasy.

[SimonB]

Yeah, you have to be a bit disciplined about it too. Because just as you can put money into your account and pay less interest on your mortgage you can also draw money out (go overdrawn in effect) up to a point at least. It's just like adding more onto your mortgage. So you can get tempted to spend loads of money because it's easier than having to remortgage to free it up, in effect you have a 20 or 30k or more overdraft limit!

 

With mine my current account is a separate account with it's own balance though, it's just linked to the mortgage. Otherwise it would be like having a massive overdraft which would be weird.

[Carl_S]

I would choose tracker becuase the base rate is so low. My mortage is currently 0.69 above bank of england base rate, which is of course orgasmic. For the moment.

[ivan]

I chose Capped, purely based on the fact that this is what we went for 10 years ago and got a couple of very good deals at that time.

 

Now it's all paid off I'm not 'in the know' of what's best these days though.

 

Whatever you go for though, I would advise you do NOT go for any interest only product.

[colsoop]

I chose fixed as the lady who i went to see said, the rates can't really go any lower so there is only one way for them to go ( granted not at the moment)

[Lbm]

I chose fixed as the lady who i went to see said, the rates can't really go any lower so there is only one way for them to go ( granted not at the moment)

 

As above

 

Fixed.

Took mine out in 1998 for 5 years (+2) @ 5.99%

Renewed in 2005 @ 5.24%

and renewed again, yesterday for an additional 3 years @ 4.59%

 

As I have stayed with my provider, there were no "product arrangement fees" and no "early repayment fees" as I did not move. Free- to put it another way.

 

I don't want any cheeky sweeteners now and get financially mugged in a year's time or so...

 

I've also (in the last couple of years) been able to over pay (Captain sensible ) my monthly repayments by an additional 10%, which has reduced the overall timescale by 4 years.

 

So in short, my mortgage is fixed- as I like to know where I am each month and in effect, it has been reduced from 25 years to 21 years- with 10.5 years remaining

[Snooze]

Agree with the above 2. Never a better time to get a fixed-rate deal. For as long of a fixed period as you can find. Get a 25-year fixed deal now, and in 5-10 years when rates are back through the roof you'll be laughing.

 

 

 

 

 

(maybe)