Offset Mortgage & Loan help!

Glover1862

A bit off an odd one this. I’ve been accepted for a loan, 5yrs 3% £15k, it was for a car but that Sale has fallen through. The total cost of the loan is £16155.00 or £1155 interest over 5 years.

Now, I could just not draw on it and cancel, however I have an Offset Mortgage, the outstanding balance is £154k, savings balance £70k, therefore I pay interest on £84k, the mortgage rate is 2.09%, term remaining 17 years. I only pay interest on £84k but I still need to repay the capital so repayments are about £775 a month, the account is setup to reduce payments not term, as the saving balance grows, my monthly payments come down but term remains the same.

If I was to put the £15k loan funds in the offset savings account, that balance would increase to £85k, can someone help me to work what the true cost would be? Loan rate is 3%, offset rate is 2.09%, I’m tempted to keep the funds if the effective loan rate works out as 0.81% which is next to nothing, I’m not sure that’s the way to work it out though. Any help much appreciated.

getmore4less

Why did you bother with a loan?

You  could have just drawn out of the offset at 2.09% and just paid that back using the payment you would have used for the loan.

that's one of the benefit of the offset a cheap line of credit.
£15k  3% 5y is ~£270pm   at 2.09% ~£264pm  at the end of 5 years you would have ~£380 extra in the offset account for the same amount out.

The basic difference will be the  0.81%  but why pay 0.81% on money you don't need?

Glover1862

Thanks for the reply, it’s in line with what o worked out. I understand that it would be cheaper to draw the money from the offset account, the only reason I don’t is that I like to keep a minimum buffer and I try to keep the offset (saving and mortgage) separate from other spending, the way I look at it, if I had overpaid on a conventional mortgage I wouldn’t have had access to the money, my target is to be fully offset and pay no interest at all. Having £15k for £380 over 5 years is very cheap. I’ve also in the past used the offset savings as deposits for BTL purchases, I’m not actively looking at the moment but if a deal came up I’d have the funds on tap.