Offsetting - reduce term, or monthly payment+overpayment?

debtdesperado

I have also posted this on the MFW board, but I think this might be a more appropriate place for it:

I hope someone can help!

I have a repayment mortgage, and have been overpaying it by a little bit each month.

I have just found out that I can add an offset facility to it for free. I am trying to build up an emergency fund, and think that it would be a good place to keep it.

It gives me two alternatives to use the interest saved by the offsetting - either to reduce the term, or to reduce the monthly payment.

If I took the reduced monthly payment option, I would add that to my overpayment.

Has anyone worked out a similar calculation? I have looked at various overpayment/repayment calculators but haven't seen one that will show me which course would be better. Any suggestions gratefully received!

LittleMissAspie

I don't think it makes any difference? The interest is still worked out monthly based on how much you've got offset, and the term doesn't affect the interest.

It might be more prudent to take the option of reducing the monthly payment (keeping your actual repayment the same of course), then if you get into financial trouble later on you will have lower outgoings.

debtdesperado

Hi LittleMissAspie

Thank you for your post which helped my thinking.

I think you are right... I'm not bothered about shortening the term, as the mortgage will be paid off faster than the term anyway, but taking the option to lower the monthly payment will effectively mean that I am increasing my overpayment, thereby enhancing the speed at which I am clearing the capital.

The examples given by the lender in the literature are impossible to compare as they show different figures (interest rates, capital, term)...banks are so crafty and that immediately made me suspicious!

vacheron

I agree that reducing the payments while putting the difference into the offset account would add up to exactly the same cost overall.

Benefits of reducing the payment rather than reducing the mortgage term is that you will have more instant access cash available in your linked account should you need it and when the mortgage is 100% offset you will have access to the mortgage overdraft / drawdown facility for the full term of the mortgage.