From: Ronald Raygun 
Subject: Re: Offset mortgages
Newsgroups: uk.finance
Date: Mon, 23 Jan 2006 11:11:05 GMT

Tumbleweed wrote:

> <127.0.0.1@127.0.0.1> wrote in message
>>
>> Trying to understand how offsets work in practise.
>>
>> On offset mortgages, say I have an interest only mortgage of £100,000 (on
>> short term) and assume my
>> monthly payments are £400.
>>
>> Does any money I have (up to £100k) in the savings linked account only
>> ever
>> affect how long I have to
>> pay the £400 monthly payments (reduce the term) and not reduce them
>> monthly
>> ?
>>
>> If so can I pay the capital back anytime and thereby reducing the £400
>> payments ?
> 
> depends on what you want.
> For example if you owe 100k and have 40k in 'savings', interest is now
> payable on 60k rather than 100k. This means that either your monthly
> payment would reduce if you kept the term the same, or that if you kept
> the payment the same, the term would reduce. My offset allows you to
> choose which you want to happen, I'm assuming others would be the same.

Do you not exercise that choice simply by deciding how much you pay?
In the OP's example it suggests he is paying £400 because that's
what he's being charged, i.e. 4.8%pa or 0.4%pm.  Having then linked 40k
savings in, he's only being charged 0.4% of 60k, or £240pm.

If he simply continues to pay £400pm, he is automatically reducing his
debt by (initially) £160 each month.  To put it differently, he has
automatically converted his interest-only loan into a repayment loan
with a term of about 230 months.  I'm assuming the bank recalculates
monthly on a daily balance.