Woolwich Offset Mortgage Maths

BiggaThanBen

I was always under the impression that the way offset mortgages work is that having a £200K offset mortgage + £100K offset savings equals to a £100K regular mortgage in monthly payments.

For some reason the Woolwich's mortgage calculator shows a different picture:



Compare to BBC's one:



Where the £200ish difference comes from, am I missing something obvious ?

Thanks

somethingcorporate

*I think* it is the fact that you still need to pay back that other 100k, even though it is offset. The additional £200ish difference is the capital repayment on the offset element of the mortgage.

I am probably wrong though!

getmore4less

BiggaThanBen wrote: »

I was always under the impression that the way offset mortgages work is that having a £200K offset mortgage + £100K offset savings equals to a £100K regular mortgage in monthly payments.

That is not realy the case for some people it is one way to view the situation but relies on the 100k savings to pay off the loan, there are others ways to look at the situation that don't asume you are going to use the savings to pay off the loan so they need higher regular payments.

Problem is that you do become more than a 100% offset before the normal term unless you start to use the savings to actualy pay off the loan

You need to know the asumptions used by the calculator to understand the situation it is portraying.

One thing to do is always think of all cases especialy boundry cases, your 50% offset assumption(the payment is based on the net borrowing) would have a zero payment if 100% offset at the start so would not pay off the mortgage and keep any of the savings.

BiggaThanBen

getmore4less wrote: »

Problem is that you do become more than a 100% offset before the normal term unless you start to use the savings to actualy pay off the loan

Don't understand this bit, assume the amount of savings stays at the same level during the term of the mortgage. The repayment (coming from another source) should be reducing from £500 to 0 through 25 years.

In most offset mortgage illustrations there is a statement that there is financially no difference if you keep this £100K in an offset saving account or repay it towards the mortgage balance apart from having instant access to the money.

In my example, if I moved the £100K to the mortgage I would have a mortgage of £100K and be £200 better off every month ? This directly contradicts with the statement above.

Also, I believe, there are no assumption in the calculators apart from the parameters that you enter from start. In case of Woolwich, this seems to be the actual algorithm they use to calculate the monthly figure every month.

Thrugelmir

I was always under the impression that the way offset mortgages work is that having a £200K offset mortgage + £100K offset savings equals to a £100K regular mortgage in monthly payments.

The answer is no.

Think of it as having two distinct accounts. The mortgage and a savings account.

Rather than receive interest on the savings account directly. The interest earnt is credited to to your mortgage account.

You repay your mortgage in the normal way. But the balance is reduced by the interest credited.

Your mortgage repayments being based on the original term and mortgage balance.

So the net effect is at some point in the future you'll have repaid your mortgage early.

BiggaThanBen

Thrugelmir wrote: »

The answer is no.

Thanks, it is more or less clear now.

So, in the example above, to be paying £500 per month, I will need to remortgage it to £100K standard mortgage rather than leaving it all as an offset?

Same amount of money, same term, but the monthly repayment will be £200 less ?

Hm, the offset mortgage option is not as attractive as it looked then ...