Financial Ponderings

My online money lobe

What in blue-blazers is an offset mortgage??? March 7, 2008

Filed under: Mortgages — financialponderings @ 5:29 pm
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I was talking to a friend the other day who said he had an offset mortgage with the One Account. He briefly explained the concept & the pros and cons, but I was still left wanting more. I have since done some research & here is my summary for those of you who don’t what an offset mortgage is:  

Basically, instead of making monthly mortgage payments as usual, your mortgage is actually tied into your bank account. It is kind of like a huge overdraft. Say you owe £100,000 on your mortgage. Your bank account will show -£100,000; OUCH!!!

Now, say you get paid £1500 monthly. when that money goes into your account, your mortgage balance goes down to £98,500. Of course, as the month progresses, it will rise as your direct debits, shopping bills & any other spending comes out of your account. It may eventually rise to £99,500 again before you get paid, at which point it drops down to £98,000.

So, what’s the benefit?

Well, because you are effectively paying £1,500 off your mortgage every month (albeit for a few days or weeks out of that month), you are not paying interest on that money during those days. So on a standard 25 year mortgage, if you can reduce your mortgage by £1500 for, say 5 days; that’s 125 days worth of interest you are not paying on that money – get it?

Sounds pretty good eh? I’d encourage you to do your own research though, as I’m sure that was just a load of waffle.

Over & out 🙂

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Mortgages: Longer terms can really hurt February 26, 2008

Filed under: Mortgages — financialponderings @ 3:14 pm
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I’ve been thinking a lot about mortgages recently. To get straight to the point, my finances are not ‘all that’ so I have been weighing-up my options on the mortgage front – to see if any savings can be made. I have considered going interest-only, but as I am currently repaying over 38 years, it doesn’t make that much of a difference. I’m tied in for another 18 months anyway, so there’s not much I can do right now.

In my searching for ideas, I stumbled across this post at My Money Blog. It didn’t really answer any of the questions I had, but the graph showing monthly payment vs term length really hit me hard.  To quote: “The graph shows that mortgage payment stops decreasing very much as the term goes past 20 years, and really starts to flatten after 30 years.”

Here I am on a 38 year mortgage. Basically, my monthly payment isn’t that much less than if I was paying over 30 years – the only real difference is the amount of interest I am paying. I felt a little sick at that thought. Especially as my financial situation at the moment won’t let me change that.

So here is my 1st goal. In 18 months (when the tie-in period on my current mortgage ends), I want to be in a financial situation that allows me to reduce my term to a more realistic 25 years. It’s going to take a lot of hard work, but it will be worth it.

If you are on a long-term mortgage, i’m not sure whether I would recommend reading the article at My Money Blog. It may give you the motivation to do something about it – which is a good thing, but it will also hurt to see just how much you are paying out for relatively little in return…