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Offset savings or pay off mortgage capital?

Hi all,

I know this has probably been asked many times before and the banks say there is no difference between the two but is this really true? Why would they make is harder to pay off the capital than to build up savings in "their" account? Has anyone got the formulas for this?

I have an Abbey offset mortgage @ 5% (0.5% ABOVE BOE) and 5 k savings being offset. Also I have redundancy and sick protection that will pay me £400 mth for a year and if unemployed doesn't mortgage interest payments get paid? So why do I have savings if I am so protected? Who knows... I can borrow back any money I overpay anyway.. Better to pay off the capital reduce monthly payments each time and pay even more each month? Also if I get made redundant and have savings the government will only grab em..

So which is best save or pay off capital? Please discuss...

Thanks

JD

Comments

  • Joe_Bloggs
    Joe_Bloggs Posts: 4,535 Forumite
    That is a good rate for an offset account. I used to have an offset too. The rate was 6%. I would agree with those that say it does not matter whether in savings or off the capital. When I had an offset mortgage I would overpay it from savings to make it a nice round number. Some would say madness but I like round hundreds and especially 500 and 1000. In reality these totals lasted for a day as daily interest was added on top. I could have qualified for a payment holiday because of the overpayments.

    It is nice to have the choice where to put your money. I used to borrow money on 0% credit cards when they were really 0%. This indirectly included my own mortgage lender. This reduced the interest paid on the offset mortgage by the equivalent of £15000 worth of capital.

    There are lots of views on this forum so i'll make way for others.
    J_B.
  • Jays
    Jays Posts: 410 Forumite
    Hi jonnydoe

    I've an off set too, with First Direct, currently paying 4.79%.

    Somewhere on here, in another thread, the general consensus is to successfully off-set you need about 30% of your debt in savings; however, I think that if your rate is as good as yours it does not matter so much (traditionally, off set rates are higher than can be found elsewhere therefore the comparison needs a higher off set to make it worthwhile).

    There are threads here: http://forums.moneysavingexpert.com/showthread.html?t=471

    and

    http://forums.moneysavingexpert.com/showthread.html?p=1959136#post1959136

    there are probably more, but these are the two I've followed.

    Best wishes
    Jays
  • Joe_Bloggs
    Joe_Bloggs Posts: 4,535 Forumite
    The 'one account' say you can't compare an offset with a conventional mortage and conventional current accounts and savings accounts. They do the comparison anyway versus very poor products. There is no need for complex cross product comparison when they can be beaten for value by more imaginative and competitive offset lenders.
    There is also an issue of personal taxation rates. If you are going to get hammered by a 40% on interest then this makes offset savings accounts a better tax shelter once ISA allowances are filled.
    J_B.
  • jonnydoe
    jonnydoe Posts: 253 Forumite
    Thanks for the advice both, yes offsetting seems to be better the more savings you have. As mortgages can change all the time I think I'd be more comfortable chipping away at the capital and borrowing back if I need emergency funds.. It's a hard decison maybe 50/50..

    Jays, is that 4.79% dicounted for a number of years then a standard rate? Whats the apr? Mine is 5% for the term of the mortgage which is hard to beat imo.. Although mine doesn't have the current account facility so I lose a few days transferring funds over..
  • GW65
    GW65 Posts: 35
    First Anniversary Combo Breaker
    Forumite
    Most of the time, the only difference between saving in the offset account and paying off capital is flexibility (i.e. no difference in interest paid).

    However, I recently stumbled across something with my Newcastle Offset Tracker where the maximum amount that can be offset is 95% of the outstanding capital. So if the outstanding capital is £100K then the most you can offset is £95K. However, use the £95K to repay the capital and you can then offset 95% of the remaining £5K - i.e. £4.5K - which allows you to save an extra few quid towards the end of the life of the mortgage..... Not a lot, but anything to avoid paying tax to Mr Brown is always a good thing ;)
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