Total Offset Confusion

rich987652

I have an offset interest-only mortgage that I took out at the end of November.

In January I made payment to my offset account of £6k expecting this wouls reduce my monthly payments, but this has not happened. I've rung up the building society, and they've explained that payments to the offset do not reduce monthly payments with payments into the offset account which has totally confused me.

They say that I earn interest on the values in my offset account, thus reduce the owing amount on my mortgage, but I don't get any benefit in my monthly payments so I'm overpaying on my mortgage. How can you overpay on an interest only mortgage??

Doesn't this go against the whole principle of offset mortgages? I'd better off putting this money into a saving account from a cashflow perspective surely. They said it only gets recalculated when there is a rate change. This means hypothetically if there were never any rate changes then my offset account is earning effective nil interest! Be better off in a current account earning 0.01%!

Have I missed anything here as I'm flabergasted by this!

Looking at the details on their website:

Will I earn interest on my savings?
The linking of mortgage and offset savings can be very tax efficient because no actual interest is paid on your savings. Instead, mortgage interest is only charged on the net balance of your accounts. This means that you receive a notional interest credit on your savings equivalent to the full gross rate of interest charged on your mortgage, without any tax being deducted.

Does this make sense to anyone? To my eyes, interest is not being charged on the net balance as it says above but on the full value as my payments are not adjusted.

Scratching my head in confusion

HappyMJ

Reducing your monthly payments won't reduce your term. The more you offset the less time it takes you you pay the mortgage off but only if you maintain the original payment. If they recalculated the payments every time you offset a bit more you'd be coming back to them at the end of the term complaining that offsetting didn't save you anything.

You can withdraw your offset amounts in the future if you need them so the longer you offset for the better.

getmore4less

The interest charged is based on the net debt so you do benifit from the offset.

WHat is happening is the payment is calculated based on the full amount of interest that would be due with no offset.

Because net interest is less than actual payment a bit of the capital gets paid off with each payment.


Most lender have the option to either fix payments(often called reduce term) OR reduce payments maybe yours is one of those that doesn't have this option.

rich987652

HappyMJ wrote: »

Reducing your monthly payments won't reduce your term. The more you offset the less time it takes you you pay the mortgage off but only if you maintain the original payment. If they recalculated the payments every time you offset a bit more you'd be coming back to them at the end of the term complaining that offsetting didn't save you anything.

You can withdraw your offset amounts in the future if you need them so the longer you offset for the better.

The references to the term are confusing me. As it is an interest only mortgage, the term is to me totally irrelevant as I'm not repaying any capital. The mortgage doesn't get repaid automatically, it is only by me putting extra capital against the outstanding balance that the balance will ever get repaid so reducing the term is surely not applicable on an interest only mortgage.

Thrugelmir

The capital balance owed on your mortgage is being reduced by the interest earnt on the offset account.

As the capital balance on your mortgage reduces the actual interest charge ( not the the monthly amount you are paying) will also reduce.

When you receive your annual mortgage statement you should receive a pleasant surprise.

If your savings accounts earn a lower rate than that charged on your mortgage. Then use the offset facility to its maximum.

Repaying a mortgage is a marathon not a sprint.

rich987652

getmore4less wrote: »

The interest charged is based on the net debt so you do benifit from the offset.

WHat is happening is the payment is calculated based on the full amount of interest that would be due with no offset.

Because net interest is less than actual payment a bit of the capital gets paid off with each payment.


Most lender have the option to either fix payments(often called reduce term) OR reduce payments maybe yours is one of those that doesn't have this option.

I'm trying to get my head around this.

Mortgage balance is £120k, with an interest rate of 3% which is an annual interest change of £3,600

If I put £6k in an offset, I would expect my interest to now be £114k x 3% = £3,420

But I don't get the benefit of that £180 per year, as my payments are not being adjusted so I am overpaying by £180 in the year meaning that £180 has been deducted from my capital.

My balance is now £119,820 at the end of the year, and so a recalculation of the interest would be 3% of £119,820. Doesn't that mean I'm only getting the benefit of the interest on the interest?

3% of £119,820 = £3,594.6 which is effectively £3600 less £180 x 3% = £3594.6.

Therefore putting £6k in my offset saves me £5.40 - an effective interest rate of 0.0009%

I know I'm confused :-)

LittleMissAspie

If you had the 6k in an account offsetting against the mortgage and you have now put the 6k into the mortgage account, then no it won't make any difference to your interest amount.

Reason being:

Eg mortgage of 120k and you had savings of 6k meaning you paid interest on 114k. Now you've put the 6k into the mortgage account so you have a mortgage of 114k and savings of 0k, meaning you still pay interest on 114k.

Thrugelmir

Your mortgage balance is now £119,820.

You continue to pay £300 every month.

So in effect you will reduce your mortgage balance by another £180 of capital by the end of this year.

So you will save interest on this £180 also. Thereby reducing your mortgage balance even further.

Overtime the interest saving will compound , Einsteins 8th Wonder of the World.

anselld

Think of it like this ....

If your offset interest rate is 3% then any money in the offset account is effectively earning you interest of 3% net.

A basic rate tax payer would need to save elsewhere at 3.75% APR to be better off. ( or 5% for higher rate tax payer)

ManicMum

Hello

I have offset with First Direct. I pay a set amount each month and that never changes because about 90% of what I pay each month is capital repayment. However, FD do write to me each month and tell me what interest I was charged that month which does vary a little bit depending on how much money has gone through my account that month. It can be quite confusing at first but I think I am almost there in understanding it now.

I like to see my balance decrease on my mortgage rather than keep funds in offset. however, FD now doing an 8% interest savings account so I am putting the max in there each month as that more worthwhile.

rich987652

LittleMissAspie wrote: »

If you had the 6k in an account offsetting against the mortgage and you have now put the 6k into the mortgage account, then no it won't make any difference to your interest amount.

Reason being:

Eg mortgage of 120k and you had savings of 6k meaning you paid interest on 114k. Now you've put the 6k into the mortgage account so you have a mortgage of 114k and savings of 0k, meaning you still pay interest on 114k.

This is exactly my point. Now, with £6k in my offset account I am still paying interest on £120k. I would be better off to keep the £6k in a much lower interest bearing account. My interest payment is not changing as a result of the £6k