Total Offset Confusion

rich987652

Thrugelmir wrote: »

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.

I do understand this logic, but you are confirming (I think) my thoughts :

If I purely look at interest payments, my benefit from the £6k offset is £6000 x 3% x 3% = £5.40.

If I was to transfer to a new mortgage, at the same rate I would interest payments of £114,000 x 3% = £3,420 which is substantially better than £3600 plus a saving of £5.40.

Alternatively if I put this £6k in an account with 1% interest, at least I would have earnt £60.

I can see from a net debt point of view, I would be better off with the offset:

Debt of £119,820 less offset balance of £6k = £113,820

Compared to:

Debt of £120,000 less savings of £6,060 = £113,940

But it doesn't surely change the fact that for the year in question in relation to inflows and outflows, I am worse off.

But maybe my net debt calc point of view is making me slowly see the light :-)

LittleMissAspie

I don't understand then sorry. You're saying the 6k is completely new to your accounts? I'm only familiar with the First Direct offset, they tell you what your interest would have been before offsetting and what it is with offsetting so you can see exactly how much you are saving each month (or rather, how much extra capital you are repaying as the Direct Debit remains the same amount).

Your 6k at 3% should be saving you £15 per month in interest. Is the £15 going towards a capital repayment?

Thrugelmir

rich987652 wrote: »

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

No, as every month your mortgage balance reduces by the interest earnt on the offset account.

redpete

rich987652 wrote: »

If I purely look at interest payments, my benefit from the £6k offset is £6000 x 3% x 3% = £5.40

I don't know what you mean by "purely look at intrest payments" but you are wrong.

In the first month after you put the £6k in the offset account you will save the interest on £6k (another £15 into your offset amount).

In the second month you save the interest on £6015, in the third month on £6030.04, in the 4th month on £6045.11 etc. etc.

At the end of the first year you will have £6182 in your offset account - so £182 better off than if you had the £6k under a mattress and £122 better off than if you put it in a 1% savings account.

Now, with £6k in my offset account I am still paying interest on £120k.

No you're not, you are paying interest on £114k. It is the monthly payment to the lender that is the same, not your interest payment. Part of that monthly payment is being added to the offset amount, not interest payment to the lender.

getmore4less

rich987652 wrote: »

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

NO NO NO

the payment does not change but the interest charged does,

do not confuse the two.

rich987652

redpete wrote: »

I don't know what you mean by "purely look at intrest payments" but you are wrong.

In the first month after you put the £6k in the offset account you will save the interest on £6k (another £15 into your offset amount).

In the second month you save the interest on £6015, in the third month on £6030.04, in the 4th month on £6045.11 etc. etc.

At the end of the first year you will have £6182 in your offset account - so £182 better off than if you had the £6k under a mattress and £122 better off than if you put it in a 1% savings account.


No you're not, you are paying interest on £114k. It is the monthly payment to the lender that is the same, not your interest payment. Part of that monthly payment is being added to the offset amount, not interest payment to the lender.

Thanks, I have now got it finally!! I can see that if I was truly trying to limit my outgoings on a monthly basis this method of not reducing monthly payments would not be good, as this does mean my bank balance has less money in every month compared to the option of having payments reduced each month.

Does this mean I could take out the £6182 at the end of the year if I wanted to or can I only take out the £6000 I put in?

rich987652

getmore4less wrote: »

NO NO NO

the payment does not change but the interest charged does,

do not confuse the two.

:j I got it now. thanks