Offset mortgage - currently reducing term, impact of reducing monthly payment instead?

ElitePanda

I have an offset tracker mortgage. Was 100% offset on a reduced term but due to personal circumstances is now 50% offset.

With the rise in interest rates, my monthly payment has gone up c. £300 in the last 9 months. I've just learned from talking to the bank that I have an option to reduce my monthly repayment (it will roughly half). 

I can't decide what I'm best off doing. On the one hand, reducing the term is nice, but on the other I wonder if I'm best off having the cash in my account in case I need it for anything in the future (given changing personal circumstances) and that will just be offset anyway so I'll benefit from reducing interest either way.

The mortgage adviser at the bank wasn't helpful in explaining if one is better or worse from an interest perspective. As far as I can tell, it make no financial difference other than me having access to the cash vs. length of repayment. Am I missing something here?

jlfrs01

It would be good to know how you can reduce your monthly payments by 50%, I'm guessing by paying a chunk off your mortgage or by extending the term?
You're right, having cash in the offset means you've always got access to it, just in case and whilst it's in there it's earning no interest but it's being used against the interest on the loan. That interest rate is likely to be quite high now if it's a tracker so taking it out to put into a conventional savings account probably doesn't make sense.

ElitePanda

Oh right sorry, so currently my mortgage term is 28 years, but at 100% offset I'm due to pay off in 13. So my options are leave as is, at 50% offset (the term will increase but be less than 28 years) or reduce the monthly payments and set it to 28 years (which will continue to reduce as I have the cash). 

You're right about the interest, my rate is 7% at the moment and savings accounts are less than this so I'm happy with it all being against the offset, I just can't work out if financially there's a benefit to the reduced term or reduced monthly payment. 

CSI_Yorkshire

Longer mortgage includes more interest than a shorter mortgage at the same interest rate.

If you reduce the monthly payments, your capital balance is higher for longer and there is more interest charged.

Reducing payments is good if you need a short term cash flow boost.

ElitePanda

But does this apply in an offset scenario? As whether I pay it off or just hold the cash, it’s incurring no interest? 

CSI_Yorkshire

Surely it applies on the 50% that you don't have offset.

ElitePanda

Yes but my thinking is if I pay £1000 a month and some of it is interest, some capital, if I pay £500 a month it’s some interest and some capital, with the balance of £500 being offset thus reducing the interest paid. 

CSI_Yorkshire

So you mean instead of paying £1000 off the mortgage, pay £500 off the mortgage and put £500 in the offset account?

ElitePanda

Yes that’s correct. 

theoretica

Is there any limit to bulk overpayments?  You could offset now, and choose to pay it off the mortgage in a block later?  I obviously haven't read your small print but my understanding of how these usually work is that you are correct - paying into offset keeps maximum flexibility but should not increase interest charged.  What would increase interest charged, of course, is if you use that flexibility... would having it available be a valuable lifeline and keep you from disaster, or would it tempt you to dip in more than you actually want to?

CSI_Yorkshire

ElitePanda said:

Yes that’s correct. 

Then I think that (as long as you don't take the money back out of the offset savings like theoretica mentions) there is no financial difference.