Offset mortgage - offset or pay capital?

ManicMum

Hello

I have offset mortgage and loving being able to pay down balance with any spare cash I have. Currently offsetting about a third. It is fairly small mortgage. Does it make any difference financially if you offset or pay down capital?

If mortgage was £40k and you offset £20k would that be any different to paying off £20k capital, leaving you with £20k balance and then offsetting with current account funds? I know that may sound simple but just checking I am not missing anything in my reckoning.

thanks.

redpete

Just looking at the sums there should be no difference.

Offsetting the fuill amount means that you could get your hands on some or all of the £20k if you need it. On the other hand by paying off the capital it means you are not tempted to spend the money and then find you are short of cash when time comes to pay it off.

sympatex

ManicMum wrote: »

Hello

I have offset mortgage and loving being able to pay down balance with any spare cash I have. Currently offsetting about a third. It is fairly small mortgage. Does it make any difference financially if you offset or pay down capital?

If mortgage was £40k and you offset £20k would that be any different to paying off £20k capital, leaving you with £20k balance and then offsetting with current account funds? I know that may sound simple but just checking I am not missing anything in my reckoning.

thanks.

My basic understanding would be the following;

How much interest would you pay on the 20k mortgage debt.
Compare that with how much interest you would receive with the 20k in savings.

If the interest on 20k savings is higher than the interest paid out for the mortgage then it makes sense to put it into savings.

At this time savings is likely to be < 3%, interest on mortgage is likely to be higher than 3%. Makes sense to offset the mortgage.

As you're probably well aware as well, keeping it in the offset allows the flexibility to withdraw without penalty. (usually)

anselld

It should make no difference to the cost.

As redpete mentioned it may depend if you want to get your hands on the offset money. And that depends who the provideris. FD, for example, let you pay off capital and draw it again at will.

With savings comparison it depends on your tax rate.
Eg ...
Savings 3% Gross = 2.4% Net for basic rate tax payer.
So if your Offset Mortgage rate is 2.5% you would be better to offset rather than save at 3%.
In otherwords compare NET savings rate with mortgage rate to decide where to place cash.

ManicMum

Hello

thanks for replies. It is First Direct at 2.49% and I can withdraw the money out again even if I pay off capital - always good to know.

I am currently a non-tax payer but I may stray into the basic rate. Husband is basic rate.

We have the savings in First Direct savings account which doesn't pay interest as it is offsetting.

cheers

getmore4less

ManicMum wrote: »

I can withdraw the money out again even if I pay off capital - always good to know.

I would play save and offset.

With a 2.49% rate you might want to look at some regular savers they pay a bit more than that

FD do one at 5%.

anselld

... and LTSB Vantage 4% ...