Well, except for two key stitch ups. I have a friend who has had these happen to him as well, and caused him a lot of hassle, but now it has happened to me I feel I can sensibly blog about it. It is one to watch if you have a Barclays/Woolwich offset mortgage.
Vanishing reserve
The reserve limit is the amount you can draw if you need. It is the difference from current mortgage balance to the original loan amount, and operates just like an overdraft limit on an account. The actual limit obviously goes up each time you make a payment as the capital in the main mortgage account goes down.
However, it seems, they can review the reserve limit and cap it at a level around what you are using. This means if you are being sensible, and not using it, they can remove the offset totally. In my case, I am using it (I did mention 0.84% did I?), but even so, some £50k of available reserve just vanished one month!
They claim I had a letter in April "proposing" to reduce it, and giving me a choice. But as I had not replied they went ahead and did it.
The new limit was not only a lot lower, but also not increasing as I paid off the main mortgage capital!
Paying too much
The other issue is that the monthly payment does not go down when interest goes down. This fooled me as the mortgage term is show on-line based on rate you are paying, even if you are using the offset. This meant my mortgage did not have long to go, and I was starting to think that clearing the offset will be needed soon.
It turns out that I am paying nearly 3 times what I need to pay to pay off in the original term! Now, in principle there is no issue with paying off the mortgage sooner, except for another big gotcha - if you pay off the main mortgage capital early, then at that point you have to clear the reserve - even if the original term has 6 more years to run at that point! You cannot clear the mortgage capital and then go on to clear the mortgage reserve within the original term, no, you have to pay off in one go.
Mental process for reinstating offset
The good news is that I had spotted this soon enough, and got the banker in Ascot to call them. She had a nightmare with the "talk to a machine" system and was saying very clearly "Mortgage offset"... "No"... "Mortgage offset", and so on, and trying new phrases, and gave up. She got her note book with many hand written notes and numbers and called a magic number to get hold of an actual person. I am so glad I did not try calling myself!
So they explain that as I had not seen the letter they can re-instate the offset. Good. But they have to do an "affordability check". Now, bear in mind I am not talking of changing my monthly payments, so why? Also, I am not that badly off, and clearly the rate I am paying each month is not an issue, but I had to go through "How much do you pay in council tax each month" and all that crap. Ironically, he was happy for me to blatantly make up shit as I did not know that one, but the banker was helpful and checked my DDs for me and confirmed the actual figure further on in the call. I passed!
They put back the offset to what it was two months ago (no, not the same level it would have been now, so around £5k lower). Close enough :-)
As a separate step they put back the system so that it goes up as I make payments. Why is that a separate thing?
Now, I hope I don't need it, but right now I think I will grab the whole lot and put in a separate account (on the offset package, so no difference in interest paid) so that they do not grab it back like this again. I would recommend* anyone with such a mortgage do the same. Indeed, having a chunk of money in an account probably helps with your credit rating with the bank!
Now, extra stupid - he then said what the payment I would have to make if I was to draw down the whole mortgage reserve today and aim to repay by end of term, and guess what - it is LOWER than I now pay by £700/month. So why the fuck did I have to do the affordability thing!
Mortgage term
Well, that made no sense - how could it be lower, and hang on - "original term"? I realised that the original term was a lot longer than shown on-line as the term. Why? Well, they base the term on the payments I am making, and they had not gone down with interest rates. Actually I have a lot longer on my term than I realised.
Apparently I can pay around a third of what I am paying, and have the mortgage back on its original term, allowing me some time to clear the offset I am using. All I had to do was ask!
My tips (*definitely not formal financial advice in any way, just common sense)
- Use your reserve, even if simply putting in a separate account on the offset. That stops them hijacking it.
- Read any letters you get, but don't count on getting them. Note that they have on-line record of letters now, but not 100% of letters - this is not recorded on the on-line banking apparently!
- Check the term shown matches the term you agreed, and if not, get them to lower payments. Remember, you can pay more, and you can simply put money in an offset account so that when you have enough you simply clear the mortgage in one go early, so the same as paying more like you are now, but with much more flexibility if you need it.
Once you know how this crap works, these really are a good system for a mortgage - I don't know if they do the same now (and I bet you cannot get that rate, sorry) but they are very flexible.
Speaking of affordability, Martin Lewis of MoneySavingExpert has been reporting some rather worrying situations where people are stretched by their historic mortgage rates, and are being prevented from shifting to considerably better (and thus affordable!) rates, because they've failed the mortgage affordability assessment :/
ReplyDeleteGiven the stupidity of today, I am not surprised.
ReplyDeleteAffordability isn't about "Can you repay this exact deal today?" it's about "When things change, can you still repay?".
ReplyDeleteIf you can't afford your current deal, then you are in trouble RIGHT NOW and saying "Well, if I qualified for this low risk mortgage, I might be lower risk" is missing the point entirely.
We have several decades of UK "house owners" who had no actual plan for how they'd afford the house. Just pay that mortgage interest every month and, er... they were sure a miracle will happen and pay off the actual capital costs. Lots of them will lose their homes.
So because people are that stupid, we now have to actually do all the maths up front for them, can you afford this loan? No? Then you can't have the loan. Yes, we know you'd love to brag about an "amazing deal" and then in a year's time come back to say you've got no money and don't want to pay. Too bad, no loan for you.
If you're smart and were taking a calculated risk, the new setup is unfortunate. But since most people were idiots and would happily take on unlimited debt with no plan to pay it back because "I'll worry about that later" we can't have nice things. If you know anybody "stretched" to pay their existing loans blame them, not the banks, or the regulator.
Technically it's the banks that were that stupid inventing the interest only mortgage in the first place. Then there was the endowment mess...
DeleteI actually had to ask for a fixed rate mortgage.. the bank were convinced that interest rates never went up ('they haven't gone up for years.. what are you worried about?'). Luckily they still had them, just unadvertised.
I had exactly the same Barclays/Woolwich offset mortgage, but at 1.49% interest. I got the letter about proposing to reduce the reserve, but since I planned to pay it all off anyway it wasn't a problem. All in all I had none of these problems.
ReplyDeleteYeah the affordability check is really a "risk" check, high risk clients pay higher interest rates or get declined altogether. Its a system I dont like but it is what it is. so basically someone with a lower income has to pay more to borrow money, not to do with affordability but to do with risk of default.
ReplyDeleteOf course where the lack of common sense comes in is that someone will have a higher risk of default on a more expensive deal than a cheaper one so common sense would move them to the cheaper deal, if they are already on the more expensive deal.
Affordability isn't like credit profiling to slot customers into higher interest products. Banks have "always" (for many decades) credit profiled customers to offer better rates to low risk customers, but the affordability check is mandated by regulators to protect consumers whereas credit profiling is just about maximising profitability. Predatory lending can be very profitable, affordability criteria rule it out, while straight forward credit profiling would favour it.
DeleteJust because we make it cheaper doesn't mean nobody will default. Thousands of people every year default on a zero percent interest loan. Free money, but they somehow can't pay it back. When people can't get their heads around this they get confusing outcomes like yours.
Suppose I have £2M and I want to lend it to people, and I'd like to make money doing this over the relatively short term of one year. I loan £1M to low risk people, they agree to pay me 5% interest on the loan, and I lose 1% as defaulters. (In practice for a small amount like £1M I would have this risk insured instead, but let's leave that aside). At the end of the year I get back £990 000 in capital, and £49500 of interest on the "good" loans. I make a modest profit (just under 4%) on my low risk endeavour.
I lend the other £1M to high risk people, at 20% interest, and 10% of them default on the loans. I get back only £900 000 of capital, but £180 000 of interest from the good loans. I make a good profit (8%) on this higher risk activity.
But suppose I decide (as you would think) that we should give the high risk people on the expensive deal the cheap low interest deal instead to magically reduce their rate of default. It partly works, now only 5% of them default. I get back £950 000 in capital and £47 500 of reduced interest payments. My customers are happy, but I've lost money. This is not a successful business. Even mutual societies can't operate on such a basis.