Overpay on Offset Mortgage or put money in savings?

TheWebDev

Although I don't have an offset mortgage, I do fully understand the concept.

Paying money into a linked account is almost always preferable to overpaying the mortgage directly. The line that NatWest spun about saving compound interest if overpaying (rather than offsetting) is complete nonsense.

While it is true that paying the money into the mortgage (overpayment) reduces the term considerably more than offsetting, it will not make any difference to the time it takes to become mortgage neutral. This is the point at which your offset savings reach the balance of your outstanding mortgage, and you no longer get charged any interest.

Offset mortgages work in a fairly similar fashion to repayment mortgages. Each year you are expected to have repaid a certain amount of the loan based upon what the interest rate is. (The higher the interest rate, the less capital you will repay). Therefore the amount that you can draw-down to, will reduce, because it is only the overpayments that you are able to re-borrow, not the regular payments.

I hope this all makes sense, and feel free to correct me if I've made any mistakes.

si-diver

Sorry to drag up old thread, but this one came up on Google when searching for the terms, so seems a good idea to add this small point.

One thing that is worth considering when looking at overpayment vs paying into offset savings, is the offset balance doesn't factor into the LTV.

If you are close to an LTV threshold, you may get a better deal if you transfer a chunk of the offset balance as a lump sum repayment to reduce your LTV, and hence be eligible for a better rate.