Confused by overpayments

Toodlepip · 12 May 2006 at 1:38PM

Hi
We have a mortgage with nationwide fixed rate at 4.89% for 5 years with a redemption date of july 2015. The mortgage is part/part cosisting of £25800 interest only (we have an endownment policy for £38000 to cover this....changed our mortgage to increase repayment part to cover shortfall of endownment....too late to claim mis-sold) and £19800 repayment.
We have overpaid by £500 for the past 3 months (maximum overpayment allowed) and can do this for a further 3 months then will have to reassess our finances to see how much we are able to overpay...unlikely to be £500 though we are keen to finish mortgage asap.
After our 1st overpayment got a letter giving us a reduced monthly payment....contacted them by phone ...asked to reduce term not monthly payments....they agreed. However then received a letter saying that the term could not be reduced as our mortgage is interest only but they would keep our payments at the same level as requested.
So I'm confused....where is the £500 coming off....just the repayment part? Or half off each part? How does this work and how does it affect my mortgage ? Sorry if I am missing the obvious...Can anyone enlighten me?

bunking_off · 12 May 2006 at 2:21PM

I don't have these complications as I have a One Account, so others may correct me where I'm wrong...

You defacto have two mortgages, being paid by a single payment.

Mortgage 1 : interest only, £25,800
Mortgage 2 : interest & repayment, £19,800

On the 1st bit, you only pay interest - I'd guess about £102/month. On the 2nd bit, some goes to pay interest, the excess to gradually lower the outstanding balance. The balance between interest and reduction of balance changes over time...at first most of the money goes on interest and the balance doesn't reduce much, then gradually as the balance falls you pay less interest and more pays off the capital (e.g. when the outstanding balance was £19,800 £79 would go on interest, whereas when it's fallen to £15,000 £60 will be interest etc).

Now, for a given interest rate and given outstanding balance, the interest payments are fixed (on both bits)...so if you overpay you won't overpay on that bit. Therefore, if you increase the amount that you pay them by £500, that £500 is all going towards chipping a larger chunk off the outstanding balance.

This is a double win...the balance is reducing more quickly, and also because it's reduced more quickly, you'll have to pay less interest on it so even if you don't overpay next month, more of your "standard" payment will be going to repay the capital and less to pay interest on that capital.

NB when you originally overpaid, the mortgage company tried to keep the period of the loan the same, so because you'd overpaid, it meant you didn't need to pay as much going forward. Versus shortening the repayment period, that's a bad deal so you've done the right thing.

Toodlepip · 12 May 2006 at 2:39PM

Thanks for that Bunking_off. I was a little concerned that if it was going to the interest only part and it couldn't reduce the term that it wasn't worthwhile and in effect my overpayments were worthless. You have cheered me , I would thank you if there was a thanks button!!!

Confused by overpayments

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