Which is best, paying a lump sum off a standard mortgage or changing to an offset mortgage?

Q I have approximately ?10,000-?15,000 in savings that I would like to put towards paying off my mortgage as quickly as possible.

The amount outstanding on my mortgage is about ?70,000 with 23 years left to run, although I can probably afford to up the monthly payments or remortgage to a shorter term.

Can you advise on the difference between paying a lump sum off a standard mortgage and the new offset mortgages - which seem too good to be true! I have no other debts to pay off.

LN

A With savings rates currently languishing, using your savings to reduce your debts is definitely a good idea.

Offset mortgages allow you to reduce the amount of interest paid on your home loan by sacrificing the interest you would otherwise earn on your savings.

If we assume your savings are actually ?12,000 and your mortgage ?70,000, then offsetting your savings against your mortgage would leave you paying interest on only ?58,000 of your mortgage (?70,000 minus ?12,000).

Obviously, that would save you a fair bit of cash in the long run - how much would depend on the offset mortgage interest rate.

You would still have your savings capital intact at the end of your mortgage term, though it wouldn't have earned any interest in that time.

Alternatively, provided your mortgage lender doesn't prohibit it, you could just pay this sum off your existing home loan, and again this would reduce the amount of interest payable on the mortgage.

However, ?12,000 represents just over 17% of your mortgage and, unless you have a fully flexible loan, your mortgage lender is unlikely to allow you to pay off more than 10% of the capital in any one year - at least not without charging you a penalty for doing so. Still, if the terms of your mortgage allow it, you could pay off ?7,000 this year and ?5,000 next year.