Offset mortgage - overpay or save the difference?

drewwa

Another question while I think of it..! Hope that's ok.

I'm currently paying the standard monthly rate on my mortgage (around 1300) and paying the same amount into an offset savings account.

My logic was that the money was more accessible in a savings account, whereas it is 'locked' when paid against the mortgage.

Question is - would I be better off in terms of knocking the mortgage on the head by chucking all the money at paying off the mortgage? Or doesn't it make much of a difference as the amount I save rises and offsets the interest anyway?

Cheers,

Drew.

Martinslovechild

It doesn't make any difference regarding the figures based on the amount of interest charged by your bank.

e.g. if you owe £100,000 and have £50,000 in your offset account, then the same level of interest is charged as for a mortgage where £50,000 is outstanding and £0 is held in the offset account.

The only difference between paying into an overpayment fund or directly against capital is that you can ask for a drawdown payment (i.e. partial or full refund) of any money held in the overpayment fund whereas you cannot do this if payments are made directly against the mortgage capital.

freda

In a normal offset account, it wouldn't make any difference to your payments if the savings were paid off the mortgage. However, as you rightly point out, it does give you some flexibiity.

One thing you could look at is to see if you could get a higher return by putting your savings somewhere else. ICICI do a 6.41% easy access savings account, there are some regular saver accounts with higher APRs. If you would earn more interest (AFTER tax) than you are paying on your mortgage, you'd be finnacially better off by 'self offsetting' - i.e. interest only mortgage with your current provider, savings with another provider.

Martinslovechild

Good suggestion. It's likely that a Cash ISA will potentially offer more than the interest rate on your mortgage (6.5% tax-free with Barclays Tax Haven ISA), but most savings accounts are almost certain to offer less after tax than you're being charged on your mortgage (e.g. ICICI = 5.12% basic-rate, 3.84% higher-rate).

drewwa

Thanks for the advice -that's reassuring. I think I prefer the flexibility just in case!

My offset is with barclays(woolwich) at 5.75% and I'm a high tax payer, so I think I'd be hard pushed to get a net interest rate higher than the offset on my savings? Currently I have around 35k offset.

Cheers,

Drew.

Martinslovechild

Correct, except in the case of a Cash ISA, because they're tax-free.

If you haven't already done so - and you can afford to invest £3000 before April 6th (or can withdraw £3000 from your overpayment fund), then it might be worth opening the Barclays Cash ISA as this will be earning 6.5%. After April 6th, you'll be able to deposit a further £3,600 as you'll be into a new tax year.

drewwa

Thanks, I'll check that out. Much appreciated.

Cheers,

Drew.

Martinslovechild

No worries.

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Trying_to_be_good

I'll do that for you, Martinslovechild!

Martinslovechild

Trying_to_be_good wrote: »

I'll do that for you, Martinslovechild!

You're a little angel