offset mortgage- for someone simple

contro

help

can someone explain to me what (if any) the differance is to saving extra per month in an offset savings account or paying extra off the mortage.

on mortage calculators the term time reduces quicker if you pay extra off the mortage rather than add to savings. is this true and could someone please explain why this is. (for someone simple)

thanks
to anyone in advance who may reply

Locoblade

The only reason it appears to be paid off quicker with capital repayment is because with the offset savings, once the offset amount is equal to the loan amount, the calculators don't pay off the mortgage there and then, they still pay it off monthly at the same amount, albeit completely interest free, until the loan is repaid.

For example if you put £300 a month into an offset on a £200k mortgage over 25 years, the offset pot would equal the remaining capital (~£60k) after 16 years, so you could pay off the mortgage there and then if you wanted to, in one big lump sum. The other choice is to continue paying monthly, where it would take another 4 years to pay that £60k off, interest free.

If you'd put that £300 a month in as capital repayment, the mortgage would have been paid off in that same 16 year timeframe.

KiKi

Locoblade explained that well.

Also FYI, in case you aren't aware: paying off capital means your mortgage payments reduce over the same time period (eg, you were paying £800 a month over 21 years, and now it's £550 a month over 21 years). Paying into an offset means that your payments stay the same but the mortgage term is reduced (eg, you carry on paying £800 a month but over 15 years).

But effectively - assuming that once your offset savings pot is the same as your mortgage you pay it off - there is almost no difference between offset payments and capital payments (pennies difference overall).

HTH, too.
KiKi

Locoblade

Overpaying capital doesn't have to mean lower monthly payments over the same payment period though, if you overpay a lump sum and then keep the main payment the same as it would have been without the lump sum, you'll reduce the term of the loan in the same way as offsetting.