Overpaying an Offset Mortgage ... or Not?

Dude321

Hi all,

We have an offset mortgage and are generally happy with it. I thought I understood them but I want to double check this.

I have read a few times over the last few days: "Even though rates have fallen, you should overpay on your offset tracker" - followed by no reason given.

Instead, if you have the discipline to channel the money you would have used to overpay into the 'mortgage savings account', this has the same effect as overpaying your mortgage?

This is what I have been doing to retain access to the money, instead of 'sinking' it into the mortgage proper.

What do you think?

Thanks in advance :beer:

Dude321

Sorry, also:

If you put excess funds into the 'mortgage savings account' instead of overpaying, does that have any bad impact on the term repayment?

Thanks,

I thought I got all this!? Confused now.

supersunshine

I am looking at an offset mortgage and look at it like this, your savings reduce the amount of interest you pay on your mortgage but the capital will remain. So if you had say 10,000 in savings and a 100,000 mortgage you would only pay interest on 90,000. The capital you owe however ramains so if you pay this off with your saving then your mortgage would be repaid earlier. I however like the idea of keeping my savings and maybe paying off the odd chunck here and there whilst also benefitting from the reduced interest. I may however be completely wrong as I haven't put it into practice yet.

smckay

as above the savings offset the interest so if you are on a BOE offset tracker that 10K is saving a small amount of interest ~1.5% so whilst it is good to have some savings set aside for a rainy day at the moment paying off the lump sum would surely make more sense for when (if) rates rise!

KiKi

Hi

I have an offset with the Abbey. You can 'overpay' in two ways. You can overpay into the Capital (ie, the money is gone, and the amount of your mortgage is reduced) or you can overpay into the Savings Pot (ie, the money is still there and accessible, and is offsetting your mortgage).

Most offsets work like this:
* If you overpay into the Capital, your monthly mortgage payments are ultimately lower, over the same time period
* If you overpay into the Savings Pot, your monthly mortgage payments stay the same, but the time over which you pay your mortgage is reduced

Neither is financially better...well, it might be by a few pounds and pence, but that's all it is. Whether you put the money in the Savings Pot and then pay it all off at the end, or whether you put the money straight into the Capital - you still pay back the same total amount either way.

And, obviously, the more you overpay, the less that total amount is.

I use the Savings Pot as I want to pay my mortgage more quickly, and I want access to my cash, just in case!

Re your first question: if your mortgage has dropped from, say £1000/month to £600/month, and you continue to pay the additional £400 into the Savings Pot, you ARE overpaying on your mortgage, you're just keeping it somewhere accessible. It's exactly the same as paying off the Capital, but it means your mortgage term is reduced (as explained above).

Eventually, the amount you owe on your mortgage is the same as the amount you have in your Savings Pot and you use one to pay off the other - or you can withdraw the cash from the Savings Pot, it's up to you. The reason for telling you to continue to overpay is because you will benefit by paying less interest on your mortgage.

I hope that helps you - I think that's what you were asking! Bear in mind that not all Offsets work in the same way, but this is my experience of them.

Cheers
KiKi

Joe_Bloggs

Dude321 Said

I have read a few times over the last few days: "Even though rates have fallen, you should overpay on your offset tracker" - followed by no reason given

Where did you read this ? And why did you pay any attention to it ?

If offsets could include cash ISAs then I might be interested again. Too bad that my tracker mortgage rate is too low and my ISA rate is too high.
J_B.

Dude321

thanks all, especially Kiki - that was a fantastic answer :-)

Thrugelmir

If your mortgage account is on a very low rate of interest. You may find it better to keep the money from the offset in a cash ISA at the current time. As it will earn more interest than you are paying.

shirlgirl2004

In addition to what has been said;

If you lose your job then any amount in the offset savings is classed as savings and could reduce entitlement to benefits. If paid off the capital then this would not happen. However, if you would be likely to be paid a large redundancy amount then this would class as savings anyway and you could not then use this as money to pay off the capital. The Benefits agency are not stupid they would know that you were trying to spend savings in order to be able to claim benefits. Because my OH has worked for the same company for 25 years he would be entitled to a large payoff, even at the most basic rate, so for us we would still continue to keep a good sum as savings rather than paying off the capital.

getmore4less

Joe_Bloggs wrote: »

Dude321 Said

Where did you read this ? And why did you pay any attention to it ?

If offsets could include cash ISAs then I might be interested again. Too bad that my tracker mortgage rate is too low and my ISA rate is too high.
J_B.

They can if you are with Barclays offset product.

Allthough you have to factor the loss if interest accumulating in the ISA over the long term especialy if a 40% taxpayer

getmore4less

With offsets if you stick the money in the offset pots or overpay it make no difference to the total cost of borrowing.

It also makes no difference to the eventual term of the mortgage at some point you are 100% offset so net zero.

NOTE: when you have the choice to keep the payment the same to reduce term or reduce payment it has no effect on the end result you reach 100% offset at the same time whichever way you do it.


The advantage of the savings pot is if there is a product that pay more interest after tax than the mortgage rate you can fund that and save a bit more.

Regular saver account are examples of accounts that currently pay more than a lot of peoples mortgage so using offset funds to feed these makes sense.