Offset mortgage- how is capital amount paid?

tingly

Hi there

Ive looked at an offset mortgage where you can offset the whole amount with your savings and therefore you dont pay interest

How does th3 lump sum get paid off at the end though?

Ie 50k mortgage over 13 years , repayment
Put 50k of savings against it

This is supposed to reduce my payments each month- presumably to nothing?

But how is the capital paid off.

Thanks

Novice_investor101

I haven't got an Offset Mortgage but I'm assuming it means that you will not have to pay the interest on the £50k borrowed. If you are on a repayment mortgage you will still have monthly mortgage payments going out, but all of the money will go towards paying off the £50k and none on any interest.
So, the capital gets paid by you paying your monthly mortgage payments every month til it's paid.
Offset doesn't mean you don't pay anything, unless it's an interest only mortgage (do they even allow you to offset them??) & You use the £50k to pay the capital off in 13 years time.

getmore4less

offsets come in repayment or interest only.

they both work just the same as the non offset versions.

if 100% offset and there is still capital to pay at the end of term you use the savings.


There is a variation of offset where the saving are in the same account as the debt, current account mortgages(CAM) like the OneAccount.

glosoli

If it's a Capital and Interest mortgage, then there is two ways it could work, depending on the lender:

1) You will still make the full payment amount every month, regardless of how much is Offset, and the element which normally "disappears" in interest payments would instead go towards the Capital, therefore it acts as an overpayment mechanism.

2) The payments will go down, only to the Capital element. So for example, if your mortgage payment is £300, and £100 of that would otherwise go towards interest if you did not take advantage of the Offset facility, then you would pay say £200 a month. On this basis, the mortgage would still be repaid in 13 years time.

If it's an Interest Only mortgage, then its a similar concept:

1) Some lenders would continue to take an Interest Only payment, but as your account is fully Offset, all of this payment would go directly towards the Capital. In 13 years time, there would still be a balance to pay off, but it would be less than the original amount due to the Offset acting as an overpayment mechanism.

2) Other lenders would reduce your payment to Nil, effectively meaning that you won't pay any Interest or Capital, and in 13 years time you would still owe the full £50,000 but you would have "borrowed" that money for free.

You would need to weigh up the interest rate applicable to the mortgage, and see whether you can get a more competitive rate of interest in another financial instrument which would make more sense for you to deposit your money into.