Debt free - should savings pay off mortgage

clarec

Hi,

I'm a first time buyer and have a 75% off set mortgage owing the bank £100k. As I don't have any other debts should I use my 20k savings to reduce my mortgage as have always had savings just in case. My concern is that it's really hard to get work at the moment if I was made redundant - although do work for three places so would have enough to live on with 1/2 jobs.

However if my annual salary of £45-50k continues I could possibly pay off 45k in three years if economising but just unsure about how much of the original 20k savings to use. The savings themselves will offset the interest of the loan but not the loan itself, will it make much difference in terms of how much I could save?

Thanks

cc

ViolaLass

It looks like you haven't really understood the point of an offset mortgage - you should be offsetting every penny you can to save on interest. Once you've set aside the 100k that you owe, you can decide whether to pay your mortgage off at that point and have no savings or wait, save more and then pay the mortgage off - either way, it will make no difference to the amount of money you have at the end.

clarec

But if I pay the mortgage off I wont have so much interest surely? And of course my savings are currently offsetting the mortgage they are not in a separate account.

ViolaLass

If you have a mortgage of 100k and savings offset of 100k, then you don't pay any interest.

ViolaLass

i.e. whether your savings are offset or whether you officially hand them over to the bank and your mortgage is reduced, you pay the same interest.

clarec

I see that, but my interst on the mortgage is around 250 a month but the loan itself is around 300 so is what you're saying that it makes no financial sense to pay off the loan itself?

HappyMJ

That's right and with such low interest you would probably be better off investing the amount you have elsewhere and earning more than the interest you are saving.

clarec

That's cool as I wasn't sure whether to buy another property or pay off the loan

ViolaLass

clarec wrote: »

I see that, but my interst on the mortgage is around 250 a month but the loan itself is around 300 so is what you're saying that it makes no financial sense to pay off the loan itself?

The point I was making was that whether you offset that £300 a month or pay it to the bank thus reducing the debt, the amount of interest you will be charged the next month will be the same.

HappyMJ's point is worth considering too but it depends what your interest rate is.

clarec

When I took the mortgage they said I could pay as much as I wanted into ti and that I could pay it off in ten years if i wanted. does this mean i was misinformed and cannot do so as want to lose the debt asap and assumed paying of the loan itself would reduce the interest as dont understand why the interest wont be reduced if the loan itself is smaller it doesnt make sense

TrickyDicky101

Any savings you have in your offset account (or other accounts with this same lender assuming they all qualify for the offset) will be deducted from the outstanding mortgage amount you owe them BEFORE they calculate the interest you owe. Hence, you only pay interest on the net debt you owe to the bank.

I would be very wary of placing your savings elsewhere - irrespective of your mortgage interest rate, you are unlikely to improve on it much without risking your capital eg thru an equity based investment.