Offsetting vs Capital Repayments

KiKi

Hi there

Sorry to bother you all, just wondering if there was a simple answer to this question (I'm betting there won't be!).

I have a (very) flexible mortgage, £162K left to pay, £185K originally.
Currently 6.24%
Monthly repayment : £1010
Additional monthly repayment which goes into offset pot : £650

The total in my offset pot at the moment is £31K, which means that as of now, if I keep up the additional repayments, my mortgage is brought down to a total of 7 years, and as my salary goes up I can probably get it down to 4 years.

I appreciate that offsetting means I reduce mortgage length, and capital repayments reduce mortgage amount per month. But my question is: in terms of total interest paid back, am I better off in the long term continuing to offset at that rate, or am I better taking that £31K and making a capital repayment? Or is the end result the same?

(And yes - have used ISA allowance first before paying off the mortgage!)

Thank you if anyone can answer the question.

IveSeenTheLight

KiKi wrote: »

Hi there

Sorry to bother you all, just wondering if there was a simple answer to this question (I'm betting there won't be!).

I have a (very) flexible mortgage, £162K left to pay, £185K originally.
Currently 6.24%
Monthly repayment : £1010
Additional monthly repayment which goes into offset pot : £650

The total in my offset pot at the moment is £31K, which means that as of now, if I keep up the additional repayments, my mortgage is brought down to a total of 7 years, and as my salary goes up I can probably get it down to 4 years.

I appreciate that offsetting means I reduce mortgage length, and capital repayments reduce mortgage amount per month. But my question is: in terms of total interest paid back, am I better off in the long term continuing to offset at that rate, or am I better taking that £31K and making a capital repayment? Or is the end result the same?

(And yes - have used ISA allowance first before paying off the mortgage!)

Thank you if anyone can answer the question.

I presume you have one of those one accounts where your mortgage and savings accounts are all the same interest rate.

If the offset pot and mortgage is the same interest rate with the same interest accrural (daily / monthly / yearly etc) then it would make no difference.

I personally would put most of the offset pot directly into the capital as then its less likely that you can spend it.

Always keep a little for a rainy day though

P.S. I ran your figures through a spreadsheet I have and if you have an outstanding mortgage of 131000 (162k - 31k offset) as of Oct 2007 and you are paying 1660 (1010 mortgage + 650 additional payments) at 6.24%, your last payment calculates as being Mar 2016.

This means you still have 8 1/2 years at your current payment amounts.
Maybe best to re-check you expected mortgage repayment date

KiKi

Thanks for your reply - yes, the savings rate is exactly the same; I never, ever touch the offset pot, I consider it 'spent' already!

You're right - it is 8.5 years; in my head I have that I will have paid it by the time I'm 37...but I constantly forget that I'm only just 29, not 30 (prematurely ageing myself). So yes, you're absolutely correct!

Again, thanks for the advice, much appreciated.

Trying_to_be_good

Kiki

It may be worth looking at a mortgage that allows unlimited overpayments - earlier this year I remortgaged (fee-free) to a tracker (+0.18% above base) that allows this, so my rate is (only!) 5.93%.

If you don't want to touch the offest pot, you could make it a capital repayment, and the reduced interest rate with this sort of tracker rather than an offset could save you a lot in the long run.

KiKi

Hi there

My mortgage does allow unlimited overpayments, both offset-wise and capital repayments, thank goodness! Actually, the interest rate has been very good until very recently when it hopped up to 6.24 with the recent rises!

I've been offsetting rather than making capital payments as I want to reduce the length rather than monthly payments, but I take your point about one with a lower interest rate. I did look around earlier this year as rates went up, but I couldn't at the time find many tracker mortgages which have the flexibility I want which were at a lower rate (I only moved in to my new place and got the mortgage a year ago - rate then was only 4.49%). The only ones I could find were fixed-rates and I'm not prepared to keep remortgaging every two or three years!

Who is your mortgage with?

IveSeenTheLight

KiKi wrote: »

Hi there
The only ones I could find were fixed-rates and I'm not prepared to keep remortgaging every two or three years!

You should consider re-mortgaging if it is decreasing your interest rate.
This makes a huge diferrance to the overall interest paid on you mortgage

KiKi

Hi there

Yes, I'm aware of the interest issues in remortgaging - I've had a number of mortgages for a number of different properties, and have remortgaged several times, so am pretty well versed in it!

But I'm not prepared to take low, fixed-rate mortgages and remortgage every couple of years! A lower rate tracker mortgage I would consider (IF it had the flexibility of my current one), but not a fixed rate. I've made a choice on what I'm prepared to sacrifice and what I'm not - and remortgaging that often isn't on my agenda!

pointypenguin

As someone said earlier there is no difference in the amount of interest if you use the money to pay back the capital or if you offset as they are essentially the same thing.

By offsetting you are not paying interest on the amount you offset.

By repaying capital you will also not pay interest on that amount.

The only issue is if you repay the capital that money is gone. By offsetting it you have the chance to get the money back if you needed.

All comes down to, will you need that money in the near future?

IveSeenTheLight

One query about offsetting accounts: -

If both the mortgage and the savings accounts have the same interest rates of 6.24%, i assume you are still taxed on the savings 6.24% area meaning you wont get the 6.24% or does the accounts calulate the whole amount meaning you never receive any interest because you are in debt?

Kaz2904

The savings don't earn anything because they are offset against the debt effectively reducing the amount of debt and the amount of interest charged on the debt.

The other thing that I would like to point out is that it can be very costly to remortgage every couple of years and the cost can far outweigh the savings especially when you are overpaying and will have it paid off quicker.
In fact if it will be paid off in 1 year or less I would look into balance transferring the amount.
(I know it isn't in this case but it's just an example)

IveSeenTheLight

Kaz2904 wrote: »

The other thing that I would like to point out is that it can be very costly to remortgage every couple of years and the cost can far outweigh the savings especially when you are overpaying and will have it paid off quicker.
In fact if it will be paid off in 1 year or less I would look into balance transferring the amount.
(I know it isn't in this case but it's just an example)

I have worked out on my mortgage that I have a 2% ERP.
Meaning anything I pay over my allowed overpayment amount will incur a 2% charge.
This initially made me think that it would not be worth to incur the ERP costs.

In fact any amount I overpay which incurrs ERP, only amounts to an equivalent paying 4 months interest on the mortgage.

Therefore as long as I do not have only 4 months to go it is worth it as I am saving money

Regarding swapping mortgages, it usually would be worthwhile swapping to lower mortgage interest, however using Kiki's figures and dropping the interest down to 6.01% from 6.24% only means you would save approx 300 pounds in the 8 1/2 years.

I can therefore understand you paying a little higher interest to maintain your flexibility