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

ElitePanda

Thanks. I’m quite fortunate in that there’s no bill payment limit or exit fee, and a life time rate. 

I was struggling to work out if there’s any penalty interest wise to switching type, or is it simply me holding the cash and offsetting (reducing interest amount) rather than paying off the capital. 

amnblog

It works like this when offsetting

The funds in your offset amount affect the daily cost of your mortgage by reducing the net interest due.

So if you have a £100,000 mortgage balance and £40,000 in your offset account, you only pay daily interest on the difference between the two (£60,000).

How that saving is reflected in your mortgage is normally a choice offered by the Lender.

1- Reducing your mortgage term

You monthly payments stay the same as if you were not offsetting. Interest charged is lower as it is been paid on the difference between your balance and your offset account. The interest saving contributes to paying off your mortgage capital each month. As a result your mortgage term shortens (reduces). 

2- Reducing your monthly payment

The term of your mortgage is unchanged but your monthly payment is reduced by the interest saving due to the funds in the offset account. This way you get immediate benefit from your offset funds rather than long term benefit.

Most borrower use Option 1 as it will lead to the mortgage being repaid quicker and therefore the total lifetime cost of the mortgage is much lower.

silvercar

We have an interest only offset that is completely offset, so we have no mortgage payments each month. We will have funds elsewhere by the time the mortgage reaches the end of its lifetime.

It means that the money is available to us at short notice if we need it.