Question for Locoblade Mortgage Calculator

BennyBrownBoy

New to this forum so please forgive me if this is in wrong place.

Locoblade - thanks for your excellent Mortgage Calculator. My question is probably a bit dumb....

When offsetting a lump sum against your mortgage - lets say a fixed £50K against a £100K mortgage, there come a point in the mortgage period when the amount offset equals the outstanding balance on the mortgage. In the calculator, after this point of equalisation, the column showing "Cumulative Offset Savings" i.e. the £50K offset balance, starts to decrease, ultimately down to zero.

Why is that? Why would the £50K put in to offset against the mortgage not remain the same throughout the entire period of the mortgage (assuming you did not add to it or withdraw)? I'm sure there is an obvious explanation but I'm having trouble getting my head around it !

Many thanks

getmore4less

Most lenders don't pay interest on surplus offset funds.

So once 100% offset you just keep it that way.

Not analysed the calculator but that would explain why you would do it that way.

Locoblade

No probs, probably best in future to just tag it onto the end of the existing thread though, so everyone can see the answer

Anyway, say you make £1k a month repayments on the mortgage and have the £50k offsetting you've mentioned. At the point when the offset is equal to the loan remaining at £50k, when you next make a payment, you'll only need £49k in your offset pot to fully offset the remaining balance, not £50k. There's no point offsetting £50k against capital of £49k as you'll not earn any interest on that surplas, so you might as well withdraw from the offset pot and use that to cover the monthly repayment.

As mentioned in the Offset Key Figures (highlight a cell / input and it will give you some info on what it's telling you), when you reach this break even point (at £50k in the example), you could either pay off the mortgage there and then with the £50k in the offset, or you can continue to pay the loan off monthly using the offset pot extending the mortgage over another few years (interest free). Either way, you can do whatever you like with the £1k a month you'd otherwise have used to pay the mortgage, because the offset pot is paying it instead.

Another way to think about it is when you break even at £50k, you carry on paying the £1k a month from your monthly disposable income, but withdraw £1k a month from the offset pot and use that elsewhere (into a savings account etc), so it earns some interest.

HTH

Locoblade

getmore4less wrote: »

Most lenders don't pay interest on surplus offset funds.

So once 100% offset you just keep it that way.

Not analysed the calculator but that would explain why you would do it that way.

Exactly, in 10x less words than I used :beer:

BennyBrownBoy

Locoblade - thanks for your prompt reply - really appreciate it. Makes perfect sense when someone explains it clearly !

Cheers,