Capital Overpayment or Offset Account?

BFJ

This is one of those things that seems really straightforward, but so much so I'm wondering if there's anything else I need to consider.

I have an offset mortgage with no ERC, so am free to make capital repayments as and when finances allow. The interest rate is 5%, so am thinking that any savings I have earning less than that (i.e. most), would be better off paying some mortgage off.

Is there any difference between making a capital overpayment or just putting the money in the offset investment account (it's not a current account offset mortgage)? If no difference seems better to put in investment account just in case I need it at some point.

Is this really as simple as it sounds?!

R00STER00

It depends on how they calculate your repayments. (If you overpay they may reduce the next months payment accordingly or they may leave it alone, meaning more of the next payment goes towards capital and less to interest. The latter is better as it decreases the term of the mortgage.)

If your payments stay the same regardless of which option you choose then there is ultimately no difference. I would probably put it in the offset account as this means you will have easy access to it - as long as you are not likely to go out and spend it all!

Joe_Bloggs

Yup. There is no benefit in paying off the capital if you can offset capital with savings. You might also try stoozing for a while to temporarily increase your savings. In this way even more of your mortgage repayment goes towards the capital outstanding and less towards paying interest.
It is as simple as it sounds. In the past offset interest rates were total rubbish so they got a bad reputation for value (Virgin One account,Intelligent finance 5.7%, First Direct 5.5% all after discount period).
J_B.

mrsw

We have an offset mortgage. For us, making an overpayment does make a difference because overpayments reduce the balance of the mortagage, and therefore the amount of interest you pay on that balance. Offsetting reduces the amount of interest, but does not reduce the balance. When we made a significant overpayment, we opted to keep our monthly payment the same, so that we are effectively overpaying every month.