lump sum causes DD payments to be treated as overpayments

mw47938 · 7 October 2016 at 7:28PM

Hi - since 2013, I have a 5 year fixed rate repayment mortgage at 2.59% from N&P. My mortgage offer states that I will pay

60 payments of £800 followed by ...

Section 4 of the offer says:

Payment reviewed: Annually on 31 DEC in each Year. Your new Monthly Payment will take effect in MAR of the following year. Your Monthly Payment may also change ay any other time, for example, when fixed, capped or discounted rate period ends.

Section 11 explains:

During each of the years of the period in which the early repayment charge is payle (se section10), you can make a combination of overpayments and lump sum repayments of up to and including £10,000.00 of the Loan without incurring the charge. If your combined total of overpayments and lump sum repayments exceed this amount in any year during this period, you will have to pay the charge which will be calculated on the excess that you have repaid at the rate detailed within section 10. The minimum lump sum repayment we will accept is currently £250.
When you make a lump sum repayment, the amount you owe and the interest charged will be re-calculated immediately.

I am currently paying £750 each month and I also make a lump sum payment of £10,000 each year. Up until now this worked fine, but I have just made my lump sum payment for this year and now I got a letter from N&P telling me that my level of monthly payments now mean that I am overpaying by some £200 each month and therefore my monthly payments have to be reduced if I want to avoid paying redemption charges,

I don't see why my monthly payments which are below the monthly payments set out in the offer and the lump sum which is within limits should trigger a recalculation of the monthly payments. N&P claim that my mortgage has an annual payment review and therefore they are allowed to do this. But I argue that this is not covered by the terms as section 4 does not state that lump sum payments will trigger a recalculation. And section 11 does not state anything to that effect either.
Also, I thought the whole point of a fixed rate mortgage was that monthly payments would remain constant at least during the fixed rate period. After that the payments can be recalculated taking into account all monthly and lump sum payments.

In my mind, I should be able to pay £800 per month plus £10,000 per year during the fixed rate period without any penalty or recalculation of monthly payments.

Anyone else sharing my view?

Cheers
M

PS: I have simplified the figures used in the text above; they are not the actual figures but this should not make any difference for this discussion.

getmore4less · 7 October 2016 at 8:43PM

Fixed rate means the interest rate is fixed not the payment.

mw47938 · 7 October 2016 at 10:02PM

Sure - but it doesn't mean variable payments either. What I'm trying to say is that by allowing to affect the lump sum payments to affect the monthly payments it effectively reduces the amount of "overpayments " you're allowed and therefore contradicts section 11.

regprentice · 9 October 2016 at 9:02AM

Your mortgage is for an agreed contractural term and , if the amount due reduces significantly due to overpayments then the repayment amount decreases not the term. If interest rates go up the bank wont keep your repayment the same and extend the term to balance out the amount due...

What you should be able to do is amend the term of your mortgage. I recently did this as i was in a similar position with nationwide. I completed a form to advise them to reduce the term of my mortgage from 14 years to 7 years. To do this i had to pay a 20 quid fee. As i understand it its easy enough to reduce the term of a mortgage but may be harder to extend the term.

mw47938 · 10 October 2016 at 7:42PM

My main point of contention is that the offer does not specify how the payment review is performed and what triggers a reduction of monthly payments. Section 11 (which describes specifically the overpayments) does mention that interest will be recalculated but it does not mention that this will also reduce the regular payments.

Interestingly, the N&P website states slightly different conditions for overpayments which are a bit more explicit but still do not mention the impact on monthly payments for fixed rate mortgages:

If you are paying our standard variable rate of interest on your mortgage
and make a lump sum repayment, you have a choice of either reducing your monthly payments or not - just tell us which option you would like when making your payment. If you have a special type of mortgage, such as a Fixed Rate Mortgage, we may apply an early repayment charge if you make an extra payment.

Other lenders are a far much clearer, e.g. TSB:

You can pay part of your mortgage whenever you want. They are known as lump-sum overpayments. When you make a payment, your mortgage balance will be reduced on the day we receive the money, and you'll start to be charged less interest. Then, because your balance is lower, you can either:
Keep paying your current monthly payment so that you repay your mortgage sooner. However, when we next re-calculate your monthly payment, for example at an interest rate change, we will set the new monthly payment to a level that will repay your mortgage over the current mortgage term. Or

Ask us to re-calculate your monthly payment immediately, so that you get to reduce your monthly payments but still repay your loan by the end of the current mortgage term. Or

If your mortgage is set up on a repayment basis, you can apply to change the remaining term. If you do this, you will need to speak to one of our Mortgage Advisors who will check that you can afford the monthly payments over the new term and advise you if this is right for you.

ViolaLass · 10 October 2016 at 8:07PM

Posts 2 and 4 appear to have been written without really reading the OP.

OP, I see the point you're trying to make. It doesn't seem to add up but I can't suggest anything better than raising the contradiction with your bank and asking them to clarify.

Is it possible two of the £10k lump sums were not quite a year apart?

exiled_red · 10 October 2016 at 8:33PM

My mortgage is with Skipton building society and I have a similar thing, I can make overpayments of upto 10% of the initial balance each year, but if I pay the full 10% my monthly repayments are reduced to what they deem as a minimum payment.

They told me that if I wanted to make large overpayments I shouldn't do it as a one off "lump sum payment" but as a series of smaller "overpayments" the former triggers an automatic adjustment of my monthly DD payments whereas the latter doesn't. From their point of view a payment of more than 3 times my regular repayment counts as a "lump sum payment" anything less as an overpayment.

The explanation that I got was that you can't pay the full 10% and maintain your initial repayment level because of the way the interest is calculated, and I never pushed it as I didn't imagine I would want to make an overpayment of more than 10% of the mortgage.

Thrugelmir · 10 October 2016 at 8:43PM

mw47938 wrote: »

In my mind, I should be able to pay £800 per month plus £10,000 per year during the fixed rate period without any penalty or recalculation of monthly payments.

Anyone else sharing my view?

Cheers
M

No. Would be my answer.

As per your OP.

During each of the years of the period in which the early repayment charge is payle (se section10), you can make a combination of overpayments and lump sum repayments of up to and including £10,000.00 of the Loan without incurring the charge.

You are only allowed to make overpayments up to £10k in total. Not £10k per se.

By making a lump sum overpayment of £10k. The following year you will save interest. For simplicity's sake let's use 5% interest.
So £500 per annum. In year 2 you will save £1,000 of interest.

You are scheduled to repay 12 @ £800 = £9.600
Actually make 12@ £750 = £9000

=Short pay net £600

Overpay lump sum £10k

Interest saved £1k

-600+10000+1000 = £400 overpayment

Apologies as not easy to explain.

muhandis · 11 October 2016 at 6:55AM

Yes, but it depends on how your bank treats overpayments. For my mortgage with NW, we have the option to choose from one of the following -

1. After every overpayment the bank keeps the monthly payment constant and revises the term downwards.

2. After every overpayment the bank keeps the mortgage term constant and revises the monthly payment downwards.

3. The bank keeps the monthly payment and term as it is and this will be recalculated at a point in the future when the interest rate changes (ie at the end of my fix).

So for both options 1 and 3 I am able to pay the monthly payment agreed at the start of the mortgage + 10% of the original mortgage penalty free.

However, if I chose option 2 then the monthly payment would go down after an overpayment and anything that I paid in excess of the revised monthly payment would eat into the penalty free overpayment limit.

In your place, what I would do is -

1. Understand the different ways in which an overpayment can be treated by the bank.
2. Call N&P and explain that your understanding was that all overpayments made would reduce the term of the mortgage, leaving the monthly payment amount as it is. And that is why you used the full limit of £10k while sticking to the original monthly payment.
3. If they refuse to budge, call on their complaints number and make a complaint citing the above and saying that you are being unfairly threatened with an ERC. Make sure you get a reference and contact details to follow this up.

Remember, someone in the bank has the discretion to hold back on these charges, but if you don't ask you'll never know.

Best case scenario they will remove these charges, put the overpayments towards reducing the term of the mortgage and let you do as you proposed.

Second best scenario would be that they waive the charges until now but you will have to follow what they said going forward or from the next year.

Worst case is that they refuse to budge and you continue to be in the situation that you are in now, no harm done.

Good luck, my experience is that the complaints team bend over backwards to resolve issues like this.

mw47938 wrote: »

In my mind, I should be able to pay £800 per month plus £10,000 per year during the fixed rate period without any penalty or recalculation of monthly payments.

Anyone else sharing my view?

getmore4less · 11 October 2016 at 7:19AM

Without the full T&C we can' be sure you missed something.

those you have given us do have some potentially conflicting information

but as 4. says

Payment reviewed: Annually on 31 DEC in each Year. Your new Monthly Payment will take effect in MAR of the following year. Your Monthly Payment may also change ay any other time, for example, when fixed, capped or discounted rate period ends

.

They have covered that the payment is not fixed during the term of the fix and have basically opened up the option to change it at anytime to bring the mortgage back on a rebased repayment schedule for full term.
even if you can convince them that overpayments should not trigger a rebase, they can do it in Dec for March anyway.

Many lender that describe the overpament option as keep the payments the same really mean(but don'r add) "till next time we rebase your payment"

I know Barclays have an additional option which is never reduce the payment only change it when it needs to go up to repay within full term.
Not sure how many lenders offer this.

mw47938 · 12 October 2016 at 11:04AM

ViolaLass wrote: »

OP, I see the point you're trying to make. It doesn't seem to add up but I can't suggest anything better than raising the contradiction with your bank and asking them to clarify.

Thanks - glad you see my point

ViolaLass wrote: »

Is it possible two of the £10k lump sums were not quite a year apart?

No - the payments were more than 1 year apart.

lump sum causes DD payments to be treated as overpayments

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