Offset mortgage - better to overpay or offset?

tcall

I can't quite work out whether it is better to overpay with an offset mortgage, or just use the extra funds to offset the interest.
On the face of it both methods will achieve the same savings. Is this correct?

Joe_Bloggs

It makes no difference. I liked to overpay enough to make the outstanding balance a round number ie nearest 100 or 250 multiple. Shame about the crappy interest rate however. I did manage to haggle 0.5% off the SVR rate after requesting a redemption quote. Dumped I.F. in the end for Nationwide as I then had no net savings only stoozed funds . Does anyone think I should apply for the 0% IF.credit card ? Perhaps they might be a tad annoyed.
J_B.

mrsw

It took me a while to get my head round this, but it does make a difference. If you offset, you are reducing your interest payments, but not the actual balance of the mortgage. Overpaying reduces the balance, the amount of interest owed and the term of the mortgage.

We have been overpaying and offsetting on our mortgage. We're 2 years into our 25 year term, and the projected term for settlement is now 15 years.

Joe_Bloggs

@mrsw
This is a tricky topic and the complexity has helped make offsets popular. They tend to advertise allsorts of benefits that one can aspire to take advantage of. They keep a low profile for the poor interest rate.

The interest charged = (Capital - Savings*) x interest rate.
Moving savings from linked savings accounts to the capital account does not effect the differece between capital and linked savings.

* With linked savings accounts you do not receive taxable interest on credits as they offset the interest payable on the capital. It is clear that linked savings can reduce interest charged and if the repayments remain the same the term of the mortgage must reduce.

J_B.