Woolwich offset mortgage... reduce term or monthly payments?

No, it doesn't mean you never overpay, it means your overpayments reduce your future monthly payments.

Well that's dandy if you plan your future to be dominated by lean times. Isn't it better to have flexibility which will let you pay less in lean years and more in fat years?

For a freelancer it is best to be able to run your loan account like a reverse deposit account. Ideally you want an interest-only loan with the ability to make capital repayments as you like when you like.

It's handed over anyway, the only difference is that it's done in a way that you can get it back should you need to.

Yes, but of course to do so would be unwise.

No. First, the prognosis for inflation over the near future is that it will be unlikely to be so high as to help you in this respect. Second, it's not the cost of the loan but the real-terms size of the debt that would be eroded, they are not the same thing. Third, some people would have you believe we might be in for a spot of negative inflation, which of course would make the debt grow rather than shrink in real terms.

Making overpayments on the loan *is* one way of prudently saving. It has several advantages over other methods. First, it is as safe as a deposit account (in that the value of your investment can only go up, not down). Second, the net-of-tax growth interest rate on this "investment" is equal to the loan interest rate, which is usually higher than any credit interest rate you can find on normal deposit accounts (with the possible exception of cash ISAs or if you're a non-taxpayer). Third, any savings method likely to give a higher return will involve risk.

Of course if you have an offset account, sticking money into the cash savings part of it is equivalent to making an overpayment, provided the savings credit does not exceed the loan debt.

In general it is never better to pay off later than sooner, because you will get charged more interest for longer that way.

"Ronald Raygun" wrote

Are you sure "the value of your investment can only go up, not down"?

Is it not conceivable that, if indeed inflation does go negative, that interest rates may also go negative?? [Otherwise, interest rates would definitely give a real return at least as large as the magnitude of negative inflation: -5% inflation & +0.01% interest means 5.01% real return?]

Is it also not conceivable that interest may possibly be lower (or more negative) than inflation? [The 1970's spring to mind!]

What overpayments? My mortgage is interest only and each month the only money that comes out of my direct debit is the interest on what i actually owe (loan less savings).

Andrew.

Fair enough, but very unwise. With that kind of setup you *should* overpay as much as possible, unless you want to write off your savings long-term.

Pretty sure, though comparing with deposit accounts was perhaps sailing a bit close to the wind. It all depends on what the real interest rate is relative to inflation. If inflation goes negative, and loan interest rates don't, then debt will grow in real terms, and therefore repayments will be a very good investment, since they will reduce the amount by which the debt will grow. If inflation is positive and large, then the debt will shrink in real terms, and though loan interest rates are likely to exceed inflation, it's just about conceivable that investing in repayments could produce poorer return than investing in something that will hold its value.

Indeed. Deposit interest rates would probably just stop at zero and not actually go negative, but they would likely be replaced with a charge for looking after your money. Loan interest rates would be unlikely to go negative.

Yes, it's conceivable. Whether it actually happened in the 70s I don't know. Short blips excepted, what probably happened is that gross interest rates may have been just over inflation, but tax thereon may have made the net rate negative.

It did happen in the 70s, and we are not far off it now, given that headline inflation is around 3% and base rates are 3.5%. Most people paying basic-rate tax on savings are losing money in real terms.

AIUI, even *gross* rates were exceeded by inflation for a time...

RR - did you include anything else in your reply post not shown above? Yours didn't turn up on my news server....

"Stephen Burke" wrote

'Twas a strange time, the '70s...... :-S

"For a time" being "short blips", no?

Yes, but nothing particularly worth framing in oak and hanging on your dining room wall. Full text below.

--beg> "Ronald Raygun" wrote

Pretty sure, though comparing with deposit accounts was perhaps sailing a bit close to the wind. It all depends on what the real interest rate is relative to inflation. If inflation goes negative, and loan interest rates don't, then debt will grow in real terms, and therefore repayments will be a very good investment, since they will reduce the amount by which the debt will grow. If inflation is positive and large, then the debt will shrink in real terms, and though loan interest rates are likely to exceed inflation, it's just about conceivable that investing in repayments could produce poorer return than investing in something that will hold its value.

Indeed. Deposit interest rates would probably just stop at zero and not actually go negative, but they would likely be replaced with a charge for looking after your money. Loan interest rates would be unlikely to go negative.

Yes, it's conceivable. Whether it actually happened in the 70s I don't know. Short blips excepted, what probably happened is that gross interest rates may have been just over inflation, but tax thereon may have made the net rate negative.

--end

Remember this post ?

Anyway they just played Motorhead's Ace of Spades on the R2 album charts.

It's just like eating chips from a friends plate and they have no calories?

___

"DP" wrote

I think you'll find that's the competition's version! :-(

Yes, but it was a bit more on-topic in umr.bbc-r2 where I posted it!

Wasn't sure that you were a regular though and this was the most recently used NG.

Cheers