Hi,

So we currently have an interest only mortgage and are looking to move house to a bigger house, and therefore bigger mortgage. Our current mortgage provider, and many others, are no longer offering interest only mortgages.

My question is, should we use the savings we have made thus far as part of our interest-only mortgage to reduce the loan amount we would require for our new house?

My thought is yes since mortgages are not a very efficient way to borrow money and, because it improves the Loan-To-Value, the rate decreases and so does the corresponding monthly repayment.

My other half made the point that we have been buying cheap units in our equity ISAs due to the financial problems, so the real gain there would come in the long term.

This is correct I think, but I think the benefit of using them to reduce the mortgage would be higher.

Thoughts?

Ive kept a decent buffer in isa but when i did the sums i was paying more on mortgage than id be earning interest on my savings

So im overpaying my mortgage with gusto rather than saving as it will look to save me around 50k in interest!

I dont have stocks and shares isas just crappy ones with ~3% interest.

Depends on how readily you need access to your savings.

It’s worth considering an offset – that’s what I’ve done at the moment – in effect it means that I’m getting the mortage rate as the interest rate on my savings but I can access my savings whenever I want.

You could use the funds already in your ISA to reduce your loan amount (a very sensible thing to do) and continue to buy ‘cheap units’ (as the market/FTSE is dperessed at the moment) in your ISA to build up another pot for the future.

First rule of money-management is (generally) to reduce debt, as the interest charged on it generally outweighs the interest to be gained in investing/saving an equivalent amount of money.

Can you look at it in practical terms? Our expensive £200k mortgage that we took out at the top of the market will cost us in the region of £425k in total repayments(if we use the full 25 year term) – would ISAs give you that much benefit in the long term?

“My thought is yes since mortgages are not a very efficient way to borrow money”

Genuine question, why’s that ?

“My thought is yes since mortgages are not a very efficient way to borrow money”

Genuine question, why’s that ?

My understanding is that as a very general rule if you borrow a pound you end up paying back two.

or three

Yes, that’s true, hence the more you can do to reduce the amount that your mortgage is for, the better since your mortgage rate will always (almost) be higher than the return you get on savings unless you take risks (eg shares, etc).

That’s why I went for offset as above to effectively allow me to reduce my mortgage while retaining access to my savings.

But that’s because of the duration of the mortgage, isn’t it.
In terms of ‘rates’, they’re pretty low loan rates…

Big question to ask – is the interest on my £1 MORE than the ‘cost’ of borrowing £1, over the same period?

TBH, I’d be keener to clear all debt (with a cash buffer somewhere for emergencies) than owe lots, but ‘have’ lots, if you see what I mean.

DrP

My understanding is that as a very general rule if you borrow a pound you end up paying back two.

But the value of that pound in 25 years you use to pay back the pound you borrow today is different.

Clubber – is your offset interest rate (i.e. mortgage rate) higher than a ‘standard’ mortgage rate?
When I looked, they all seemed to be (this was a few years ago)

DrP

DrP – no – the rate was competitive with non-offset mortgages (with same LTV, repayment period, etc) when I took it out a year ago. Yorkshire Building Society FWIW.

Mortgage is about one of the most efficient ways to lend money, its just the term of the repayments that ends up costing.

Id re-iterate whats been said already, offset mortgage product probably the best bet, after that id recommend reduce some mortgage and keep a cash buffer.

My aim would be to pay that mortgage off asap, off setting against savings is a good way, could you look to move to a bigger house in a cheaper area?

Only slight downside is that Offset mortgage rates aren’t that great right now. GF was looking to move her house to one and the rates were much higher than her existing mortgage, so it doesn’t make sense right now.

Could well be the case though if you have savings you’d also need to weigh up the benefit of better ‘interest’ on your savings in the offset than leaving your savings in an ISA or similar that’s not paying much interest.

OP… going through the almost the same myself ( but I have an offset repayment mort, wouldn’t consider anything other )… and have decided to dip into the ISA (that had previously been for very long term savings/pension and whats left will remain as such. As I’ve found it too tempting to use savings that are in the offset pot).

Your wife’s right but investments can go down as well as up.

Lots of good advice above… BTW mortgages are the most efficent way of borrowing money… you can get a mortgage at 2.5% at the moment… not really sure how you can borrow money cheaper ??

BTW mortgages are the most efficent way of borrowing money… you can get a mortgage at 2.5% at the moment… not really sure how you can borrow money cheaper ??

Yes I take your point. If you want to borrow a large amount of money over 25 years then a mortgage is the best way. My general question was whether it’s better to have a higher mortgage value and keep investments or to reduce the mortgage value since it is expensive, even if efficient.

I’d say there’s not much in it. If you get 3% from the isa then 10k will be worth 20k in 25 years, if you borrow 10k then you will pay back 20k over the 25 years (all very approximately). Having a higher LTV might mean you get a better rate, though. Personally I’d keep a bit of money in the isa for a rainy day/new kitchen and put the rest into the house.

EDIT, just to add, I know very little, I’m just juggling my mortgage, isa, pension and self employed earnings at the moment and confusing myself

I had an offset mortgage and cant recommend it highly enough. If you’re in the position to be able to offset a substantial amount of the mortgage, then it’s a no brainer. No other form of saving (without risk) will offer the same benefit as offsetting your mortgage.

I’m getting to the point that (in case of redundancy) I have 5 x mortgage repayments in an ISA, which thanks to golfists is earning 4.01%. I intend to move it from ISA to ISA annually.

After that, and becuase my work bonus is cumulative with the final 2012 quartlerly payment being January 2013, I intend to make a captital payment each January to reduce the term. Currently it ends when I’m 65 but I want it to end south of 60 (i have a choice of reducing the term or reducing the monthly payment).

Logically I’d use all savings to go full in against the mortgage, lower loan amount is always best.

The pessimist in me would keep some back in a ISA as an ‘insurance’ against job loss etc.

I’m not a risk taker 🙂

Can you go offset?

I pay off all my capital through investments, but I keep it offset to remain liquid.

Having said that, I’ve taken money out of the savings to put in ISAs as they offer a higer interest rate, 5% ISA vs 2.5% mortgage. It could be argued that I’m using borrowing on my property to invest elsewere technically, but it doesn’t bother me.

Logically I’d use all savings to go full in against the mortgage, lower loan amount is always best.

The pessimist in me would keep some back in a ISA as an ‘insurance’ against job loss etc.

This is the beauty of offsetting.. you are reducing the term and you still have access to all your capital should you need it.

You still pay the same amount each month but the majority of the payment will go to reducing the initial loan amount instead of interest. Thereby reducing the term substantially.

I’ve got an offset mortgage. Its so good I contantly find myself asking “where is the catch”

The interest rate isn’t the most competitive but this is far outweighed by how flexible it is.

Aside from offsetting any savings against the interest you can over or under pay by any amount. Once you are ahead of you “guide” postion you could just not pay you mortgage for a while if you like or you can carry on paying extra into it and watch as you mortgage decreases from 25 year to 10 years.

Its not for everyone. Offset mortgages are better suited to people who are in the position to pay a bit extra than their standard monthly payments or have a decent savings pot. But if you are in this position they can save you thousands of pounds

Who is everyone with for their offset mortgages?

Looking around there certainly seems to be fewer providers offering them…

First Direct. 2% above baserate for lifetime

Offest mortgages are all well and good, but it appears the OP has his savings in an equities ISA, so he’d still need to cash that in to take advantage of an offset mortgage?

To the OP – I think you’re gonna have to take a punt on whetehr your “cheap units” are gonna take off over the next 5/10/15/20 year period, vs the increased cost of your mortgage in the short term.

Who is everyone with for their offset mortgages?

Mine was with EGG who are now Yorkshire building society.

Mortgages are not very efficient if you use it to, say, buy a car with some of it. But very efficient otherwise, as peolpe say, it’s just how you pay it back that causes the grief 😆

If the ISA money you have means you can drop into a lower band for interest then I’d say go for that option.

Out of interest have you done the sums for the new repayment mortgage based on the larger figure you need to borrow? I think ultimately that’ll decide for you. Going from interest only to repayment is a fairly big shock before the fact you’re actually getting a larger loan.

My curent mortgage is just ending but it allowed me to overpay every month, this reduced the interest but also it built up as a little ‘fund’ I could actually take out again (or use for a payment holiday etc.) if required, which was nice to know if things went wrong.

Keep enough in the ISA for rainy day money, get the mortgage as low as possible with the rest – that’s what I’d do.

Out of interest have you done the sums for the new repayment mortgage based on the larger figure you need to borrow? I think ultimately that’ll decide for you.

Yes, you’re right. Looking into it further there’s pretty much no option but to use the ‘investment vehicles’ we have built up with our interest-only mortgage to reduce the mortgage repayment otherwise the LTV would be too high as would the monthly repayments.