offset mortgage, which is best offsetting or overpaying

350nutter

In the process of remortgaging with FD on a 5 year fix, I was lucky and got my foot in the door in time..

I intend treating the mortgage as a repayment and can afford a £100 a month overpayment. I was wondering if keeping the extra money in the FD current account offset against the mortgage or just paying it off the capital makes more sense. I like the idea of having the money available should an emergency crop up but is there any other financial advantage to either way?

paulb369uk

350nutter wrote: »

In the process of remortgaging with FD on a 5 year fix, I was lucky and got my foot in the door in time..

I intend treating the mortgage as a repayment and can afford a £100 a month overpayment. I was wondering if keeping the extra money in the FD current account offset against the mortgage or just paying it off the capital makes more sense. I like the idea of having the money available should an emergency crop up but is there any other financial advantage to either way?

I am in exactly the same situation just waiting for the ok with the mortgage but I also intend to overpay, any suggestions guys and girls.

Thanks

mrsm

it makes no difference if you keep in the 1st account, transfer to your savings account or "pay off" the mortgage. All will equally reduce your capital thus reducing your interest and whereever you put it you will still have access to it (any overpayments to the mortgage account can be transfered back to your savings or 1st account and used as needed).

I'm overpaying £250 every month. £80 is within my monthly DD and will go straight to the mortgage, I think I'll probably pay the rest there too. But I shall use the savings account to keep track of money I know I'm going to spend again in a short time say money I get for my birthday, the money I save towards my daughters pre school fees. I can clearly see what I have to spend but in the meantime its still being offset

hth

KiKi

Hiya

I have an Abbey flexible mortgage that I offset, so I'm making the assumption that the FD one is the same.

There is no significant financial benefit (it might be a few quid, but it's nothing to shout about!) to one over the other.

If you make capital repayments, then the *length* of your mortgage stays the same, but you effectively reduce the amount you are paying every month.

If you offset, your *payments* stay the same, but the length of your mortgage reduces.

The great thing about an offset is that it acts as a tax-free savings account but without the limitations of an ISA. So if you were to overpay by £100 a month, that £100 goes into a savings pot. That pot builds up until you have £1200 in there after a year. The interest that you *don't* pay on £1200 of your mortgage is then credited to your savings pot.

(ie, if the interest rate is 5.75%, then you get 5.75% tax free on whatever is in your savings pot every month.)

I much prefer offsetting as I plan to pay off my mortgage quickly - but then I also have quick access to my money if I want it. Of course, it means that when the offset savings pot is equal to the mortgage, you either have to pay it off, and then have no savings, or withdraw some to keep for a rainy day and start building up your savings pot again.

I hope that helps you.

KiKi

MarkyMarkD

AFAIK it does make a difference, but only that the minimum payment required is the interest on the mortgage part. So overpaying will reduce that minimum payment whilst offsetting will not.

Capricorn_One

KiKi wrote: »

The great thing about an offset is that it acts as a tax-free savings account but without the limitations of an ISA. So if you were to overpay by £100 a month, that £100 goes into a savings pot. That pot builds up until you have £1200 in there after a year. The interest that you *don't* pay on £1200 of your mortgage is then credited to your savings pot.

(ie, if the interest rate is 5.75%, then you get 5.75% tax free on whatever is in your savings pot every month.)

KiKi

I may have this wrong but my understanding is that you pay interest on the un-offset amount but pay the same payment as you would every month. There's no interest added to the savings pot. It just sits there offsetting the total mortgage. So your monthly payment contains more capital than it would normally.

Apologies if that's what you're saying. It's getting near midnight.

owitemisermusa

Of what benefit to the bank is an offset mortgage? Surely, it's not a product being offered out of the goodness of their hearts?

Unless..... the amount offset swells their coffers and gives them funds to invest......

mrsm

MarkyMarkD wrote: »

AFAIK it does make a difference, but only that the minimum payment required is the interest on the mortgage part. So overpaying will reduce that minimum payment whilst offsetting will not.

Well FD told me it made no difference what so ever. Each month I will receive a statement detailing the interest, it takes into account the money in my 1st account and my savings account. But as someone else said I do not earn interest on my savings, just reduce the amount I owe on the mortgage. If i was paying interest only my payments would vary depending on what I have in those offset accounts but I've set a fixed monthly DD so each month the amount of capital I pay off will vary (until such a time I decicide to use the money in the savings and 1st account and even transferring back from the mortgage to those accounts)

350nutter

After reading the above post, I think I'll be best setting up a DD to clear the mortgage in the term and any putting any extra money in an offset savings account. I'll get quick access to it should I need, but it's essentially helping reduce the mortgage when sitting in the account.

Thanks all, that's helped clarifying it for me.

mrsm

350nutter wrote: »

After reading the above post, I think I'll be best setting up a DD to clear the mortgage in the term and any putting any extra money in an offset savings account. I'll get quick access to it should I need, but it's essentially helping reduce the mortgage when sitting in the account.

Thanks all, that's helped clarifying it for me.

That's my plan too, but only because its more visible in the "savings" account. Once your mortgage is set up you'll see the account online along with your 1st and savings. If you need money you've overpaid into the mortgage you can just transfer back to your 1st account. I think its instant but certainly within 24 hrs.
I'd rather keep the monthly overpayments there so i'm less likely to spend it but money i intend to use in the near future will go into the savings.


{just need a text now telling me the remortgage is complete and I can put my own words into practice:rotfl:)

Mr_helpful

You are probably a candidate for the one account mortgage.