offset v overpayment

wildcherry

Hi,


We have an offset mortgage that is linked to a savings account that holds £60k. We can make extra payments of up to £520 per month. Are we better to but the extra £520 into the offset savings account or over pay, or half and half? Our primary aim is to reduce the term.


Any advice greatly appreciated.

silvercar

Offset money should always be available to you, should you need it.

AnotherJoe

Need to know the interest rates to make any judgements

wildcherry

Another Joe -The mortgage rate is 1.84% for the first two years and then 4.99% after that.
Good point silvercar

zagubov

You'll have to transfer a minimum sum to the mortgage anyway but I'd let any surplus stay in the offset savings account in case of roof falling in etc.

However you know yourself best; would you want the discipline of transferring money into the mortgage so you're not tempted to splurge on anything frivolous?

wildcherry

Thank you zagubov. I'm not really a spender and certainly not very frivolous! My aim is to reduce the term as swiftly as possible as I'd really like to be MF within the next 10-12years.

AnotherJoe

wildcherry wrote: »

Another Joe -The mortgage rate is 1.84% for the first two years and then 4.99% after that.

And the rate on your savings account(s) is ?

I had an offset mortgage and very useful it was but I think those days are gone now. When you can earn £1k on interest without tax (so £2k for a couple), unless you are higher rate taxpayers the utility of these arrangements for saving money is greatly reduced.

Its also unlikely that your interest rate in 2 years time will be 4.99%, you'll surely switch to a another deal which will most likely be the same or slightly lower as now eg 1.5 % or so

zagubov

silvercar wrote: »

Offset money should always be available to you, should you need it.

I'd forgotten this. Some offset accounts are set up so you can transfer capital out of your mortgage account. A warning sign flashes up to tell you this could make payment of the capital slow down, but they may still let you do it.

So paying off the mortgage may not be an irreversible step. Maybe this varies between mortgage providers. First Direct let you do it.

silvercar

zagubov wrote: »

I'd forgotten this. Some offset accounts are set up so you can transfer capital out of your mortgage account. A warning sign flashes up to tell you this could make payment of the capital slow down, but they may still let you do it.

So paying off the mortgage may not be an irreversible step. Maybe this varies between mortgage providers. First Direct let you do it.

Interesting. Coventry don't, a warning message appears telling you that the money will be used to reduce your mortgage balance and isn't retrievable.

I would caution that, even if the lender allows transfers out of the mortgage capital now, they may not in the future.

zagubov

silvercar wrote: »

Interesting. Coventry don't, a warning message appears telling you that the money will be used to reduce your mortgage balance and isn't retrievable.

I would caution that, even if the lender allows transfers out of the mortgage capital now, they may not in the future.

Good point. Perhaps the OP should be wary of overpaying and just leave it in the offset savings account if the lender might be keen to make overpayments irretrievable.

jamesd

wildcherry wrote: »

We have an offset mortgage that is linked to a savings account that holds £60k. We can make extra payments of up to £520 per month. Are we better to but the extra £520 into the offset savings account or over pay, or half and half? Our primary aim is to reduce the term.

There's no difference in effect on the term whichever you use but you should almost certainly use the offset account.

The money in the offset account is yours by right. Nothing the mortgage lender can do to prevent you from taking it out. By contrast, if you were to tell a mortgage lender that you had lost your job the mortgage lender would probably bar you from taking out overpaid money because that is a facility which is normally at their discretion.

While this means that the offset account normally wins there is a possible catch. The money in the offset account is vulnerable to benefits means tests. Money overpaid on a mortgage account normally isn't. In the short term this would make little difference but it may matter if you were to be injured or ill and unable to work for many years or even decades.