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Fully Offset

sunnyjoe
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Fully Offset

#351981

Postby sunnyjoe » October 30th, 2020, 2:48 pm

Hi All,

My wife and I have two offset mortgages on our house. The mortgages are offset by various accounts and, following a long slog and some recent windfalls, the mortgages are now fully offset. In addition we have been making and continue to make monthly capital and interest repayments. What next?

1) Immediate repayment. We could pay off / redeem the mortgages and surplus income could be used for savings/investments and treats. This seems to have the benefit of clarity and simplicity.

2) Continue monthly payments until the end of the mortgages term (about 8 years). The offsetting surplus could again be used for savings/investments and treats. A downside would be some additional administration, shuffling money between accounts. An upside would be instant access to borrowing the equivalent of an authorised overdraft of several £100k if we should need it (the lender allows unlimited withdrawals and repayments without penalty, subject to the original borrowing limit and interest)

Interest on the two mortgages tracks the BOE base rate (+1% and +2.39%)

Are there any other options or factors we should consider?

I am still working full time and do not intend to retire for at least three years. I am stuffing my pension with the maximum annual allowance and will probably retire before I reach the LTA or my state pension age.

My wife is about to retire from her part time job and has a good pension, equivalent to her present earnings.

Our children are both (mostly) independent.

I would be interested to hear your thoughts.

Spet0789
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Re: Fully Offset

#351987

Postby Spet0789 » October 30th, 2020, 3:19 pm

It sounds like your offset mortgage may be with a different provider to mine (First Direct). I would think the right thing to do is just to stop making any payments and push the cash elsewhere, whether that means spending, investments or savings.

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Re: Fully Offset

#352085

Postby MikeyWorld » October 31st, 2020, 6:10 am

Mine was with Yorkshire bs. It was fully offset within 2 years. Each year the monthly payment has dropped £20-30. I throw that payment back to my current account each month, it's a couple of minutes work on banking day. I'd be checking the account anyway, it's no real hassle, and I have an assured overdraft, if for any reason I needed one.

It probably keeps your credit rating healthy too.

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Re: Fully Offset

#352092

Postby Adamski » October 31st, 2020, 8:14 am

I paid mine off as soon as. Just for us psychologically better not to have a mortgage. Then I built up cash savings for a few years, then started stock market investing. If you got maybe 3 years to go may as well get you ducks in a row, repay the mortgage and do home improvements, then if you early retire can start without big outflows. That's how I did it anyway. Cheers Adam

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Re: Fully Offset

#352148

Postby pochisoldi » October 31st, 2020, 10:56 am

My offset mortgage (interest only, BOE+0.69%) has two options - reduce the term, or reduce the repayment.
After a few years I set it to reduce the repayment (by that point I had paid off about £2k, then I turned that into a overdraft facility on the linked current account.)
I have been 100% offset at various points, and all that happens is my monthly statement omits the line saying how much they will debit that month (i.e. nothing payable).
I haven't been permanently 100% offset, as I've been able to find somewhere to save money that pays more interest than I pay on the mortgage. (no chance of that happening again soon once the regular saver mature...)

I intend to keep the mortgage account balance the same, and offset to 100% where there's "nothing better to do with the money" until the mortgage is due for repayment. At that point I will look at what I've got (cash, ISAs, pension) and reshuffle accordingly.

I don't have any other debt, but as far as I see it, in the meantime, I have a cheap borrowing facility, that I can draw down on any time that I choose.

Now if there were to be any savings "haircuts" or other shenanigans to pay for the current situation, then I would probably look at transferring money from offset savings to mortgage, and increasing the overdraft facility, to minimise the haircut and still allow me access to cheap cash lending.

Pochisoldi

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Re: Fully Offset

#352206

Postby Gerry557 » October 31st, 2020, 1:18 pm

Can you clarify if the savings are in additional accounts to the actual offset savings ie :-
Mortgages x2 = £100k and offset savings = £100k or
Mortgages x2 = £100k and offset savings = £50k plus £50k additional savings

If the offset are full then the interest should be zero!

Second, are there any penalties for paying down early? Do you have additional emergency funds of 6m outgoings if you pay off the mortgage?

You have that mortgage facility now but you might not get it back again if circumstances changed. I also think it depends on how disciplined you are. No dipping in for luxuries you can't afford but nice to know that if the roof caves in you can get access to instant funds to fix it. I assume that you are fairly good.

Low interest rates means its not expensive to service interest, you could tilt funds into ISAs so you don't loose the allowance. Hopefully finding returns better than the interest rate. If the offset savings is not 100% filled the income could be used to overpay the offset as you have 8 years

Shares are cheaper now than have been for a while, although could get cheaper still.

Paying off reduces worry, has less admin but might not be the best financial thing to do. You have to weigh up which are most important to you or do a blend of all the options a bit of this and a bit of that.

What other expenditure might you have over the next 8 years, new car how will that be funded. You can add into the offset savings and then take it out when needed etc.

The offset is a flexible tool, used wisely its very beneficial, too good to give up? It goes without saying that if you do pay off any of the mortgage you pay the expensive one first.

Have I got your situation right.

sunnyjoe
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Re: Fully Offset

#352226

Postby sunnyjoe » October 31st, 2020, 2:56 pm

Thanks All for your thoughts.

Spet0789, both mortgages are with first direct. Stopping monthly payments would simplify matters. Last time I tried to reduce monthly payments (some years ago) they wouldn't let me (computer says no). I just sent requests to cancel both standing orders, let's see what happens.

MikeyWorld, Let's see if the above allows me to avoid even those few minutes of banking admin each month. I like the assured overdraft aspect.

I'm not really bothered about credit rating. In recent years the only loans I have taken were interest free loans for specific purchases and only because at that time I was still paying mortgage interest which the loan could offset.

Adamski, I think I have achieved the psychological breakthrough just by fully offsetting (it feels so good) so I don't feel a strong need to pay off the mortgages right now. We already have some stocks and shares ISAs which I hope to use more extensively now. No major home improvements needed or planned at present. We should probably increase our net cash position to a level that provides a reasonable safety net, as we shouldn't rely on the mortgages as an overdraft after we have retired. Therefore I think we should pay off the mortgages before I retire. Thanks for priming me to think that through.

Pochisoldi, our mortgage didn't propose any options, but we chose to continue (and increase) our regular payments with the aim of reducing the term. Just like you, there might be a time between now and my retirement when we dip into the mortgage to temporarily fund some family expense.

Gerry557, each of our savings accounts (there are about a dozen for various purposes) is allocated to offset against one or other mortgage. Our offsets now exceed the mortgage balances and therefore we pay no mortgage interest (but receive no interest on the surplus).

There are no penalties for paying down early. The surplus is not yet at a level that I would like to rely on as an emergency fund without access to the mortgage facility.

I could divert funds to my stocks and shares ISA, but I'm no Warren Buffet. My IRR for the last 13 years is just over 4% but individual years have varied between -42% and +18%. With probably only another three years before I retire (when I am starting to think I will probably pay off the mortgages) it's too volatile to fund ISAs from my mortgages, although I will happily throw surplus cash at ISAs.

One of the offsetting savings accounts is used to save for a replacement car. I generally use savings rather than finance. Many of the other accounts are also for specific purposes.

Yes, you have assessed my situation quite well.

Once again, sincere thanks to all who took time to respond to my request.

sunnyjoe

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Re: Fully Offset

#355123

Postby DrFfybes » November 10th, 2020, 10:00 am

Obviously the benefit is the easy availability of a low rate loan, so how about a halfway measuree?

Pay off one of the mortgages, either the highest interest rate or the largest amount, and keep one as a fallback should you need it. This way you simplify your finances (and should the worst happen your children will really thank you for that if they need to take over) but don't lose flexibility. The repayments for the one you close can go into your "car fund" account or Premium Bonds if you like a little flutter :)

Paul

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Re: Fully Offset

#355272

Postby chris » November 10th, 2020, 4:21 pm

Hi Sunnyjoe

Be careful about cancelling the standing orders. What effectively you have is a mortgage and one or more credit accounts linked to it. We had a First Direct offset mortgage and whilst we had enough in the accounts (we had various 'pots' linked to the mortgage) to offset the mortgage, we still continued paying the monthly mortgage payment although obviously no interest was added to the amount so it just kept reducing until we finally paid it off.

Whilst you have the mortgage and are not repaying it, in theory, you are defaulting on it. Whether they would ever mark it as that is questionable, but it depends if you have got someone who doesn't look at the big picture assessing what you are doing.

Yes we could have transferred the whole amount over and repaid it but we preferred to have the option, if ever we needed it, of spending part of the accumulated savings.

We then opened savings accounts (cash and shares) and transferred some of the excess into those, so that we had enough to cover the value of the mortgage in the main account, so that we weren't paying interest, and at the same time kept paying the mortgage down and transferring money into savings.

Fortunately, after we cleared the mortgage and because we didn't 'close' the mortgage account, when we had some work done on the house, we just drew down some of the availability on the mortgage and started repaying it again. We didn't even have to ask, we just made a transfer from our mortgage account (which had a decent amount of availability) to our current account.

We found that by continuing to pay the mortgage, we were not tempted to increase our spending because we had extra income and so built up a reasonable reserve in stocks and shares as well as savings. We are free of mortgage again (or we have a mortgage of £1 so that they keep hold of the deeds).

Chris

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Re: Fully Offset

#355323

Postby airbus330 » November 10th, 2020, 6:19 pm

I have run a FD Offset mortgage for the last 10 years. I have it fully offset by cash on account and no interest is added. When I took it out FD asked me to make a modest payment each month to reduce the capital, I think it may have been a requirement on affordability scores. Last year I reduced that payment by half. I received a letter advising me that the mortgage needed to be repaid on schedule and to make sure I had funds in hand to do so at the end date. I suspect this was a standard letter, rather than specific. Nothing has appeared on my credit history about this in the last 16 months.

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Re: Fully Offset

#355332

Postby Spet0789 » November 10th, 2020, 7:16 pm

I took out my First Direct offset in 2012 and then 'reset' the maturity from 2037 to 2044 last year.

I have a standing order for the interest but any principal repayment is just a regular monthly payment from my current account to my mortgage account (the latter is obviously a negative balance).

If my original borrowing was -100, I currently have a mortgage balance of -50 and a savings account balance of +25 for a net -25 on which I pay interest.

I don't currently make principal repayments (either in the sense of reducing the -50 or increasing the +25) as I prefer to invest my excess cashflow, which is about 1 per month (in these units). Next year I should be receiving lump sums which will enable me, if I wish, to reduce the net balance to -10 or so.

What I love about this arrangement is the huge flexibility it provides me. There is pretty much no cashflow disaster I won't be able to weather, and that helps me to sleep at night, even though I probably pay 1% more in interest.

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Re: Fully Offset

#355480

Postby Gerry557 » November 11th, 2020, 11:17 am

Sunnyjoe.

As you get towards retirement lenders are less likely to offer you a mortgage. If your deals run after this time I might be tempted to hang onto them and the flexibility and or emergency funds.

It seems silly to overpay if you are not gaining any interest because you have an overfulled offset. Your car and other spending commitments if they are soon might change that. Obviously keeping the offset full is the best and safest option as you can pay the lot off at any time of your choosing or if the bank demands.

If your surplus and commitments are some time away what not build up you emergency funds or invest. Use the income to pay down the mortgage albeit slowly to begin with and as that then reduces the need to offset then releases for funds to invest. Hopefully this gives you time to keep the flexibility, slowly reducing the mortgage and build up an investment pot.

There are risks that the market might fall but if you are adding the surplus plus the saving and released funds it should grow quicker that the mortgage. The surplus could also be used to reduce the mortgage or top up offsets if circumstances change or you get scared of the market. Investments need to be fairly stable rather than at the risky end. I would have said 50 50 with bonds but I'm not too sure if that still holds although the bonds side should increase as you get older.

I think is down to you to weigh up various options, risk assessment, spending priority and deciding on what fits you best.

One other consideration is about the mortgage providers. Normally you would pay off the expensive one first but which one is likely to allow you to extend the offer past your retirement.

If there isn't time

sunnyjoe
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Re: Fully Offset

#355866

Postby sunnyjoe » November 12th, 2020, 2:12 pm

Thanks again for all your thoughts.

To all those with First Direct offset mortgages,

I tried to cancel the standing orders for repayments of my two offset mortgages. One instruction was accepted and the other was rejected. When I called them to discuss it emerged that one had been flagged as an interest only mortgage and the other as a capital and interest repayment mortgage.

Since both mortgages were established prior to 2014 (some rule change about interest only vs capital and interest?) , FD was content to cancel both repayment standing orders provided that I agreed to nominate a current account from which they could debit mortgage interest in case I was not always fully offset. This cuts down my monthly financial housekeeping, so quite satisfactory.

I will retain both mortgages fully offset until I retire and possibly longer (both must be repaid at age 65, retirement age when we took them out).

Meanwhile emergency fund and investments will receive any surplus.

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Re: Fully Offset

#355884

Postby Spet0789 » November 12th, 2020, 3:03 pm

sunnyjoe wrote:Thanks again for all your thoughts.

To all those with First Direct offset mortgages,

I tried to cancel the standing orders for repayments of my two offset mortgages. One instruction was accepted and the other was rejected. When I called them to discuss it emerged that one had been flagged as an interest only mortgage and the other as a capital and interest repayment mortgage.

Since both mortgages were established prior to 2014 (some rule change about interest only vs capital and interest?) , FD was content to cancel both repayment standing orders provided that I agreed to nominate a current account from which they could debit mortgage interest in case I was not always fully offset. This cuts down my monthly financial housekeeping, so quite satisfactory.

I will retain both mortgages fully offset until I retire and possibly longer (both must be repaid at age 65, retirement age when we took them out).

Meanwhile emergency fund and investments will receive any surplus.


Just one note of caution.

I also have a FD offset mortgage. Let us assume that the total size of your offset mortgage is £300k. In FD terms, you would have started with an offset mortgage (OM) balance of -300 and a savings (S) balance of 0.

If you have fully offset, you could either now: (i) put the money into the OM account and increase that balance to 0; or (ii) put the money into your savings account and have an OM of -300 and S of +300. In either case, your interest is 0% and you have access to the 300 if you need it.

If HSBC goes bust, savings are protected subject to the FSCS limit of 85k. I'm pretty sure that in case (i), your mortgage is basically terminated at 0. You lose no money, but you use the flexibility to dip into your offset pot. In case (ii), your mortgage remains outstanding at -300 and you are at risk on the savings balance above 85k.

Clearly this is all quite unlikely, but bear this in mind. The safest thing in this example would be to hold 80k in S (assuming you have 5k in your HSBC current account) and pay OM down to -80k.

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Re: Fully Offset

#355909

Postby sunnyjoe » November 12th, 2020, 3:53 pm

Thanks Spet0789

My present position is similar to your case (ii)

I had rather optimistically assumed that, in the event of HSBC going bust while I had substantial savings offsetting a substantial mortgage, my net position would be unchanged i.e.

- I would owe FD the outstanding mortgage sum
- FD would owe me the savings sum
- if FD could not repay their debt to me, they could (should? would?) cancel an equivalent sum of my debt to them

You say you are "pretty sure" that this is not the case. How did you reach that conclusion?

I will carefully consider your advice about minimising savings within the FSCS limit (£85k x 2 account holders).

Kind regards,

sunnyjoe

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Re: Fully Offset

#355931

Postby pochisoldi » November 12th, 2020, 4:55 pm

Spet0789 wrote:If HSBC goes bust, savings are protected subject to the FSCS limit of 85k. I'm pretty sure that in case (i), your mortgage is basically terminated at 0. You lose no money, but you use the flexibility to dip into your offset pot. In case (ii), your mortgage remains outstanding at -300 and you are at risk on the savings balance above 85k


According to
https://citywire.co.uk/funds-insider/ne ... ed/a461448

Under the new rules cash compensation up to £85,000 will be paid to depositors - including those with offset mortgages. But any excess over the £85,000 will still be offset against the mortgage – by the liquidators, not the FSCS, which is where the confusion came in.

For example, if you had a mortgage of £250,000 and an offset savings account of £100,000 you will receive £85,000 cash compensation from the FSCS, and the liquidator with use the remaining £15,000 of your balance to reduce the mortgage to £235,000.


I'm not sure how the £85000 limit would work, if, for example, you had say £5k in non-offset accounts, and £100k in an offset savings account.

I would hope that this would result in £85k in compensation, and a mortgage balance reduced by £100k+£5k-£85k)=£20k

PochiSoldi


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