Mortgage offset against savings - is it better to have smaller mortgage or more savings?

[MrsMcNulty]

I am being made redundant and will get enough of a payout to reduce our mortgage to only three times my husband's salary, which will ease our household finances when I stop working. I am not planning to look for another job for a while due to health reasons (cancer). We have an offset mortgage and some savings in the linked account, and we pay a fixed amount every month so we pay off mortgage interest and a certain amount of the capital (depending on how much savings we have in the linked account).

My question is - would it be better to keep the redundancy money in our linked savings account which is offset against the mortgage interest, or use it to pay off a chunk of the capital, or does it make no difference?

Apologies if I have not explained very well, I am hoping someone on here will understand what I am trying to ask and have some wise advice...

Thanks in advance!

I think it better to pay off mortgage - mainly as this is what I am doing - mortgage interest rate is higher than savings and doing it with the mortgage I have means I can always get the money back should I need it.

Thanks ZZMum. Our savings rate is effectively the same as the mortgage rate though, as the savings account is zero interest and linked to the mortgage account - so everything you save is offset against the mortgage interest. That's why I'm not sure whether we win by keeping the savings offset against the mortgage, or using them to pay off a chunk of the capital. So so confusing...

I guess you need to shop around to see if you can find higher rate savings accounts then to see if you can gain - I never did as my mortgage rate is quite low - the alternative would be to make a higher risk of doing a longer term investment in a stock market instrument to see if you can increase value of savings to pay off mortgage with the increase in fund value - long term this has been shown to be better solution just requires more nerves as values do go up and down to quote the cliche!

I'm a bit scared to gamble my hard earned redundancy cash - I have paid for it in stress etc. over the years! Mortgage rate is quite high as in fourth year of 5 year fixed rate, so no "safe" savings accounts with higher interest that I can find.

We also have an offset mortgage, albeit with a slightly different set up to yours (so we don't have a linked savings account - it is all just lumped in to one). Certainly in our case it would make no difference - effectively money in savings simply serves to reduce the mortgage, thus cutting the amount of interest owed each month. There are a couple of things I'd want to be clear on with your account:

• Does money in the savings account immediately act to reduce the amount outstanding on the mortgage or is there any delay? If there is no delay, then there would appear to be no significant advantage to paying off capital.
• Can you access money that you have previously paid off the capital or is that no longer available? If it is no longer available, that would be another reason to keep the money in the savings account.
• Do you trust yourself to leave the money in the savings account or will it be too tempting? If you trust yourself, then leaving it in the savings account may be better.

Personally I would leave the money where you can access it in case of emergencies (i.e. in the savings account), but would just want to think about the points above.

Good luck - especially with the cancer.

Forgot to add thank you for replying so quickly, I really appreciate all advice am quite rubbish with maths!

If the savings and interest rate are the same and you could need access to money in the future(which you may I know I did related to serious health issues) I would offset it and keep things fluid. Hope you are well now x

Thanks Lemon, I am officially in remission from breast cancer but have another 7 months of treatment ahead! In answer to your questions:
-Money in savings immediately offsets against mortgage interest, so by paying a fixed amount each month on mortgage (which we do) we pay more of the capital off the more savings we have;
-No longer available;
-Yes we would be sensible, save earmarking some for a couple of much needed holidays we are v sensible with money!

We are thinking of leaving the money in savings until the mortgage term ends (next year), then paying off a chunk when we remortgage so our monthly repayments will go down, to make our lives easier on one salary. Does this sound sensible or would we be losing out at all?

Thanks noddy.

I take the view that it's better to keep it in the savings, offsetting against the mortgage than commit it to the mortgage. That way you're not paying the mortgage interest, but you still have easy access to the money if you have an emergency.

I don't think it would make a difference otherwise (although I may be wrong) except that if you pay a chunk off the mortgage they'll re-calculate your payments so you'll have a lower monthly payment from then on (but then, at least on mine, you can switch your offset strategy to do that anyhow, so you could have the same effect and keep the saving separate too)

x-post - that sounds like a good idea - especially since you tend to be able to get better deals with a better loan to value.

Thanks ChunkyPickle and to all, you have all been very helpful

We keep it in the savings pot and offset it to reduce the mortgage term rather than apply it against the capital to reduce the mortgage monthly amount. Why? We want to keep it liquid so we can access it quickly.