Offset mortgages - Should I pay a lump sum off

CharlieJo_2

We are confused by our offset mortgage statement from the Woolwich. We have recently paid a lump sum of £10k off our £190k offset mortgage. The monthly interest charged on the mortgage has of course now fallen, but this has fallen by less than the amount of offset interest that our savings appeared to have been generating before using them to pay off the lump sum.

Can someone assist please as we are considering paying off further significant lump sums. Are we better to pay the lump sums off the mortgage as we get them, or will we get a better deal overall by keeping them in savings accounts to offset the mortgage interest payments and then use these savings to pay off the remaining mortgage once the savings levels have reached the amount of the outstanding mortgage debt?

All help gratefully received.

Many thanks

getmore4less

It makes no difference, interest is charge on the net borrowings
(I have a woolwich offset).

You will need to give more detals from your statements of why you think it may be wrong.

redpete

I always thought that offset mortgages just meant that you could effectively reduce the capital outstanding by the amount of your savings, not that you would have different rates for the mortgage and for the savings.

Anyhow, in general it would be better to save in an account offering higher rates than you are paying on the mortgage rather than pay off the mortgage.

CharlieJo_2

The mortgage statements read as follows:

December 2009

Balance £190k
Offset £25k
Offset mortgage rate 1.35%
Interest charged £191
Interest saved from offsetting £27


Paid £10k lumpsum at beginning of Jan 2010

January 2010 statement

Balance £180k
Offset £15k
Mortgage rate as before 1.35%
Interest charged £189
Interest saved from offsetting £18

From this it all appears that by paying off the £10k lumpsum we have saved £2 interest on the mortgage debt in the month, whilst having saved £9 less from the interest offset on the savings! In total, it looks like we are £7 per month worse off!!!

Are we reading this all wrong?

Thanks

penguingirl

Ignore the 'interest saved from offsetting'- this reduced because your value of offset reduced (from 25k to 15k)

The thing to focus on is the interest charged (as that is the cost to you)- you paid £191 in december and £189 in january, so it pretty much stayed the same (well you are £2 better off, but I'm guessing that's due to the amount of money in your current account or something).

Hope that helps explain it.

redpete

I'd say that the interest charged number is the actual amount charged - after taking account of the offset. The difference in the amount of interest charged for the two months is probably down to a different number of days in December and January.

Nothing there about different rates for the mortgage or the savings.

But, as you can easily get more than 1.35% interest in a different savings account, why pay off the mortgage or keep your savings in the offset account?

noh

Your are reading it incorrectly.

In December you had £190000 outstanding mortgage and £25000 savings so your net debt was £165000 on which you paid £191 interest for the month.

In January you had an outstanding mortgage of £180000 and £15000 savings your net debt is still £165000 you paid £189 interest on this for the month.

The difference of £2 was down to the number of days in the accounting period.

By using money in the linked savings account to reduce your mortgage you do not change the amount of interest paid as your net debt doesn't change.

As has already been stated by previous posters you would be better off placing the offset amount in a different account paying more than 1.35% net. ie if you are a standard rate taxpayer an account that pays more than 1.7% gross.

Gorgeous_George

My offset pays just 1.24% so I moved the savings to an account at West Bromwich Buidling Society paying 4.3%. That's the easy bit.

I guess that the discrepancy is based on the date that the transfer of funds took place. At 1.35% you should be paying £202.50 in interest on the £180K balance which may suggest that the transfer took place mid-month. Search this site for locoblade's mortgage calculator - this may help to make sense of it all.

And move that money. Cash ISAs at 3%, regular savers at 5% - anywhere that beats 1.35% after tax (1.6875% gross for a basic rate tax payer).

GG

getmore4less

CharlieJo wrote: »

The mortgage statements read as follows:

December 2009

Balance £190k
Offset £25k
Paid £10k lumpsum at beginning of Jan 2010

January 2010 statement

Balance £180k
Offset £15k

As others have said
You moved £10k from the offset fund to the mortgage account this makes no differece to the net borrowings.

Any reason for doing this?.