Offset mortgage Vs traditional mortgage overpayments

edited 31 December 2019 at 3:56PM in Mortgage-Free Wannabe
5 replies 258 views
scottaiiscottaii Forumite
3 Posts
edited 31 December 2019 at 3:56PM in Mortgage-Free Wannabe
Hi all,

Hopefully you can help answer my question. My current mortgage is up for renewal and so looking to get a new one setup. I'm going go get a 15 year term with a plan to aggressively overpay to bring the term down to 5 years.

To achieve this i will be well over the usual over-payment allowance of 10% that most mortgage providers offer.

To combat this, i found something i hadn't looked into before - "Offset mortgages" with a linked savings account (I'm currently looking at a product from Coventry Building Society on a 5 year fixed Offset 1.85% Fixed rate to 31.12.24)

Question:

Would making a monthly £2000 deposit into the linked offset savings account have the same effect as making a £2000 mortgage over-payment on a traditional mortgage (to keep it simple, lets say both interest rates are the same)?
i.e Will the term come down by the same amount and so i can pay the mortgage off earlier in the same time? or is there some other magic to this i haven't realised?

(If both are setup to reduce term. Effectively i'm looking to use the offset mortgage as a way of making over-payments without penalty, but don't want to get "caught out" by not understanding something)

Thanks for your time,
Scott

Replies

  • getmore4lessgetmore4less Forumite
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    Offset funds mean you are borrowing less, just the same as if you overpaid.
  • scottaiiscottaii Forumite
    3 Posts
    Hi getmore4less,
    Thanks for the response to that. So is this product in effect a mortgage where the term expands and contracts? For example if my car breaks down and i need to get £10000 out of the linked savings account to buy a new one, does that in effect just extend my term back out?

    Where i also get confused here is the below scenario:

    I have two choices:
    1) Agree a 15 year term at say £1000 per month
    2) Agree a longer term at say £500 per month, knowing that i WILL put an extra £500 per month into my offset savings

    Why would i not choose #2? In may head #2 would allow be to end the mortgage in the same term as #1? With the added benefit of if for whatever reason i could only afford £500 one month i'm covered.

    Cheers,
    Scott
  • getmore4lessgetmore4less Forumite
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    Forget term that is just to set the contractual payments.

    All that matters with a mortgage is the amount borrowed and rate

    payments just pay the interest and reduce the amount borrowed.

    Taking money out of offset account is just borrowing more money.

    Longer term and overpayment(upto ERC limits) give flexibility.
  • scottaiiscottaii Forumite
    3 Posts
    Again thanks for your quick reply.

    OK, so just to be super sure, lets say i arrange an initial offset contract for £100,000 @ 1.5% over 15 years.

    If within 5 years the [mortgage capital remaining] - [offset saving balance] = £0.
    My monthly charges would then be 0 * 0.015 = £0 for the remainder of the mortgage term?

    Or am i missing something?
  • george4064george4064 Forumite
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    scottaii said:
    Again thanks for your quick reply.

    OK, so just to be super sure, lets say i arrange an initial offset contract for £100,000 @ 1.5% over 15 years.

    If within 5 years the [mortgage capital remaining] - [offset saving balance] = £0.
    My monthly charges would then be 0 * 0.015 = £0 for the remainder of the mortgage term?

    Or am i missing something?
    Correct, you would only pay interest on the amount where your mortgage capital remaining exceeds your offset savings balance. If your offset savings balance is equal or higher than your remaining mortgage then you are 'fully offset' which means you won't have to pay any interest whilst you continue to match or exceed the remaining mortgage capital.
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