Offset Mortgage: Mortgage Interest period vs Savings Interest Period

Kav1234

Hi All,

I took an offset mortgage and fortunately I managed to accumulate some savings.

So I'm on a mortgage of 165k with savings of 140k at an interest of 5.25%

I have been paying an interest amount of around £80 per month for Dec, Jan, but in Feb, that £80 jumped to around £140. I was surprised and called the provider. And basically they explained that the interest is calculated as

Mortgage interest = 165k x 5.25% x 30/365 = 711

Savings Interest = 140k x 5.25% x 28/365 = 560 because Feb has 28 days

and the difference comes to around the £140 payment

This suggests that some months like Feb, I get less savings interest but other months, I get more savings interest and I infer that over a whole calendar year, the interest period between savings and mortgage become the same and it all balances out.

However, this makes no sense if I am fully offset because if savings > mortgage, then there is no interest on the excess (Savings less mortgage) and in the month of Feb, I will still have to pay interest, even if I am fully offset. So I will be charged in Feb because of the 28 days but in say other months where there are 31 days, the savings interest will not exceed the mortgage interest and will not balance out the Feb payment. Hope that makes sense

This seems unfair and not what an offset mortgage is for.

Thanks for helping out

Flugelhorn

how frustrating - I haven't had an offset mortgage for years but when I did I thought it was calculate more like:

£balance of mortgage - £savings = £amount to pay interest on

when it was fully offset the amount to pay interest on was £0

silvercar

You could put in a complaint and see what they say.

I’ve had the quirk where notional interest in the offset savings offsets the interest on the loan for the following month, rather than the current month. All good until there is a rise in interest rates and my mortgage repayment is higher by the difference in interest rates on the total loan.

Grumpy_chap

Which offset mortgage does the OP have?

We have an offset mortgage with FD and the way it works is "mortgage outstanding" - "savings balance" = "net balance" and the interest is only calculated (within the mortgage) on the "net balance". The savings show as not receiving any interest. Savings balance is not allowed to exceed mortgage outstanding.

The good thing about the way ours works is that the savings do not receive interest so there is no income to declare in that regard, which could risk income tax liability and / or consume savings tax allowances.

The way the OP has described their offset working reads to me as though the savings are declared as generating an interest income and may then give rise to income tax liability.

Also, the way the OP's scheme has been described seems inconsistent. I did wonder whether the months referred to are not the same month, so February is in arrears for the interest on savings (28 days) but the offset is in advance for March interest on the mortgage (except that would be 31 days and not the 30 days typed in the calculation).

MWT

https://forums.moneysavingexpert.com/discussion/comment/81960530#Comment_81960530

I had the same experience with a Barclays (Woolwich) offset mortgage, but it does make sense that what you earn in one month is used against what you pay the following month as the interest earned is paid in arrears and the paid is forecast and paid in advance.

Kav1234

https://forums.moneysavingexpert.com/discussion/comment/81960530#Comment_81960530

Sorry, from your reply, I remember them mentioning that. But still makes no sense when you are fully offset since you no longer get savings interest

Kav1234

https://forums.moneysavingexpert.com/discussion/comment/81960717#Comment_81960717

So you may be charged in February even if you are fully offset

Kav1234

https://forums.moneysavingexpert.com/discussion/comment/81960710#Comment_81960710

My offset is supposed to work the same way. i.e. I get charged interest on the excess of the mortgage over the savings. And that's how I understood it should work. But this weird difference in period is making me think that the mortgage provider gets to charge me in Feb when I'm fully offset (because there is no savings interest when fully offset combined with that difference in period)

Grumpy_chap

So, does your savings account show interest paid / credited to the account?

If that does, then the interest is possibly liable to income tax.

Quite different from my FD offset where the interest I pay is simply reduced.

If the savings accounts never show interest credited, then the quirk around timing probably balances itself out over time.

Kav1234

https://forums.moneysavingexpert.com/discussion/comment/81962147#Comment_81962147

It doesn't show interest separately.

I agree with you that it balances out over a 12 month period.

I was more thinking when it's fully offset i.e. savings equals the mortgage. At this point, the mortgage provider stated that no more savings interest is payable. This implies that, in the month of February, using their approach, I will have to pay some mortgage interest of £+47 (165k x 31/365 (January) x 5.25%- 165k x 28/365 x 5.25%(February).

However, this £+47 won't balance out with other months because, say in March, I should be paid interest of (165k x 28/365 (February) x 5.25%- 165k x 31/365 x 5.25%(March)= -71 but this is capped at 0. Maybe I'm misundertanding and it's not huge amounts