Best way to make Overpayments

@Thrifty
It all depends upon the interest rate of your offset. I could get better tax free returns on a mini-cash isa. I would not want to throw my isa tax allowance away by withdrawing the money. If you have funds sloshing in and out of your offset and if this is other peoples money then why not take advantage in a leagal and responsible way. Many people build up tax receipts in such accounts.
J_B.

Ok this is how I see it:

Offset savings - reduce interest you pay on mortgage by the amount of savings without affecting monthly payment. Basically a savings account paying the mortgae interest rate, 5.35% tax free or whatever..

Capital reduction - reduce interest again and reduce monthly payment (inc capital portion) (and then overpay by paying the same amount as before)

Both exactly the same with regards to time and interest saved.. although I've not seen the formulas..

So a flexible account why have one?, it seems to be a fancy way of saying have a tax free 5.35% savings account.. or in my case 5% which I could easily increase by having a separate isa..

The more savings you have offsetting the more compound interest works its magic wonders... Capital reduction seems to be better at the start of the mortgage as you get instant results, offsetting takes more time..

Example:

I made capital reductions which reduced my monthly payment from £400 mth to £345mth, I can now overpay £55 extra on top of my normal overpayment. I think it's £4 mth for every £500 overpaid..

Now I have £6k in "offset" savings earning me £25 mth interest at 5% tax free. If i make a capital reduction of 6k this reduces my monthly payments by £48 (£4 every £500 overpay). £48 > £25 BUT my monthly payment has less capital reductions.. hmm discuss!

Anyway I'm still a bit confused.. Think I'll go to bed..

Cheers

JD

@Thrifty and all
If you want to minimise the amount of time it takes to pay off the mortgage then ask the lender not to reduce the regular payments in response to capital overpayments or mortgage reserves. This also results in less paperwork for the lender informing the borrower. It does become tedious when they do not comply or understand. Some lenders are dim in this area others are helpful.

Increased money in offset savings is as effective in reducing interest paid on mortgage capital. It is also unlikely to trigger a regular payment reduction that restores the repayment amount appropriate for the original term less the expired time.
J_B.

Hi there, new to all this, but as we've got a hefty mortgage and are starting a business, all tips are gratefully received!

We have an offset mortgage which allows us to have a children's account linked in, so they still get tax-free interest on their money AND the balance offsets against our mortgage! Before I hear cries of 'Exploitation!'...we have an offset account for each child which we save into for their future (they know nothing about it) and they still have an account at the local building society into which they pay their pocket money if they want to - never too young to appreciate the value of money and saving. It might be worth asking your offset provider if they offer this.

Also - we rang our existing provider and asked them if they could reduce our interest rate to the current offer they were advertising. They did, we didn't have to faff about moving the mortgage and we're £200 a month better off, some of which is now going into overpayment each month!

Happy money saving and debt reducing!

i thin that SO is the best option because you can change it sooo easily and it can be changed from daily to wekly at the touch of a button