The last few years of an offset mortgage

[FeinCuroxiVooz]

I've worked out that an Offset Mortgage will be a sensible decision for us when our current mortgage deal comes to an end in June.

Our "emergency backup" fund is currently sitting in an account which gives a slightly higher than "instant access" type accounts, with terms that discourage withdrawals but don't make them totally impossible like the highest-rate accounts do. So that rate is well below the rate we will be charged when we have to rearrange our mortgage. If we switch to an offset we will effectively save several hundred pounds per year, even with the marginally higher interest rates of an offset product, so that seems worth doing. We are also expecting to receive a lump sum, less than the amount of mortgage we still owe but quite significant, some time in 6-18 months and with an offset mortgage that amount can effectively go straight into the offset account and we can decide what amount is notionally "paying down the mortgage" and what will be "adding to savings" when the time comes - if we didn't have an offset we would need to stick it into a separate account and wait for the next mortgage rearrangement date.

But here's my question. In a few years time after all this juggling, eventually we will get to a point where the amount in our 'savings pot' becomes equal to and eventually exceeds the amount owed on the mortgage.

so how is that managed when that time comes? I wouldn't want to have the account closed and declared that the mortgage "is paid off" - we'd then have suddenly zero savings. but equally I'm sure the lender isn't going to pay out credit interest at the same rate as the mortgage charge if the savings exceed the debt. So how does it work? has anyone finished paying off a mortgage using an offset method who can explain?

As the amounts became equal we siphoned off into ISAs or other interest bearing accounts.

First Direct never mentioned closing the account but used to write to us to warn us that we would be saving with no benefit.

We kept the account for quite a while until we were comfortable to close it.

The offset mortgage will have an agreed term and a redemption date. The bank won’t suddenly redeem it early.

Yep, we siphoned off the excess.
So, money from offset account into current account each month, which was then used for other stuff (Isa, pension, new roof!)

so do you have multiple transactions every month, mortgage payment into mortgage pot from current account and, same amount immediately extracted from offset savings pot back into current account to keep the balances equal, and then paying that amount into a different savings product eg an isa? that sounds quite complicated and possibly not easy to manage - I know the paying in can be automated but can the siphoning off be set up to happen automatically?

At least with First Direct, you can just not pay into the mortgage account at all if you don't want to.

I keep an eye on the balance on mortgage and oddest account, I'm with santander and it'd really easy. Last year I put a large amount into a savings account fixed for 2 years, and we're planning work on the house which will cost a chunk this year.

When our savings account balance exceeded the mortgage balance we didn't pay any interest at all on the mortgage and we received a small interest payment on our savings. There was no suggestion that the mortgage should be cleared by savings - the term of the mortgage remained the same. We kept the mortgage going way beyond when we could have paid it off as it was a cheap and easy way to access further funds for home improvements. We only cleared the account and closed it once DH got a pension lump sum from a previous employment. The total control of overpayments and flexibility of additional borrowing worked well for us over the years.

We had an offset mortgage. There was no need to shuffle monies between accounts at all.

We had a small inheritance when about 10 years into our mortgage and decided to use it with an offset mortgage.

So, continued paying the mortgage at the normal rate with a reduced interest rate (and for a time, we managed to overpay, no penalty involved) but crucially did not allow the bank to reduce the monthly payments as the capital reduced (which they wanted to do).

Eventually the mortgage capital became less than the savings so then paid us interest on the savings. Admittedly not much but the mortgage was then interest free.

We plodded on keeping the monthly payments the same and eventually paid off the mortgage entirely, 6 years early with all of the inheritance capital intact.

In all, we saved a little over £7K in interest..

My mortgage has had a zero balance for several years but I could still go back and borrow the money if I wanted to until the original redemption date. It is no longer linked to a savings account (just my current account).

With mine you can unlink accounts so you get whatever the ordinary rate of interest is on ones that aren't linked.

We have an Offset with First Direct. Haven’t paid mortgage interest for over 10 years. We just get the letters telling us we have more money in the accounts than we need. We both have single accounts so the only time you really need to coordinate is where you might move 40k out of linked accounts -both paying into ISAs at the same time, to make sure you leave enough in not to pay interest.