Overpaying - Have i done the right thing?

feedtheram

Hi all,

I have recently taken out a 35 year mortgage for £238,500 5yr Fixed Rate at 5.63%.

I was advised to overpay as much as possible so decided to do so. I phoned up my lender and requested my monthly payments go up to £1550 (from around £1300). The woman i spoke to told me she would send me something to sign and return - i didnt recieve anything to sign.

I did recieved a letter stating they had updated my account following my request and adjusted the mortgage term to 22 years.

After reading several different threads i am worried that this is not the correct way to overpay and i should have made a capital payment?

All i want to be sure of is that when i come to remortgage at the end of the fixed rate i have paid off as much as i can so the remortage amount is less and i can pay it all off quicker with less interest.

Could anyone advise if i have done the correct thing in changing the monthly payment?

On a side note: is it better to save up in a high interest account and make a lump sum overpayment once a year - or make smaller payments every month? i dont really understand how the interest is calculated on a fixed rate - i thought you pay the same amount of interest each month but that doesnt seem right thinking about it now.....:rolleyes:

in conclusion....i am very confused!

any help would be greatly appreciated

Many thanks,

James

whitewing

Can't advise you in any mathematical kind of way as it confuses me too.

All I can say is that I find it easier to overpay as and when I can. I don't miss the money at that point and it makes me feel good. If I saved with a view to overpaying a lump sum, then I would agonise over whether to overpay that or keep it for a rainy day. The temptation with savings is reallocating it for something else. (I have no self-control!)

dimbo61

hi james
just ring up the lender and ask !
I think because the term has come down from 35 to 22 years that the overpayments are coming off the capital but check to put your mind at rest.
If you are happy paying that amount each month then carry on and forget about the mortgage till the 5 year deal is nearly up.
Save some money in ISA,s as a rainy day/ emergency fund

Jennifer_Jane

I am sure that this is coming off the interest not the Capital. I have an interest-only mortgage and pay off as and when I can (when it was fixed, it was limited to 10% repayment a year), and I discovered (on this website) that you had to let them know it was to come off the capital. So I always send a cheque and a letter clearly stating it must come off the capital.

The result is that my monthly interest payments have reduced, but the term has not. And the capital is down from £60000 to £17000. All this is confirmed in the letter they send to me each time.

So if you are interest-only, what has happened is that they have simply shortened your term and in 22 years you will still need to repay all the capital. Whereas before you had 35 years before you had to pay off the capital (and of course you would have paid considerably more in interest because of the longer term).

Rather phone them and ask if you can repay over 35 years with the extra every month going towards the capital not the interest. If they say that's not possible, then ask what the annual repayment allowance without penalty is, and for how long that will be in force (now my fixed mortgage is finished I can repay however much I like, so I assume for you it's 5 years).

Then put the (balance of the) repayment into a good ISA/savings so you have that for when the five years are up.

Best, of course, to do the arithmetic and ensure you're happy with this. It's not hard to do. I wonder why you didn't go for a repayment mortgage in the first place?

I think that answers all your questions - but to sum up: check if you will be penalised by overpaying annually; check whether it is in fact possible to overpay against the capital with the direct debit; then rather save the money you can afford ISA/savings until you have enough for an annual payment without penalty, and ultimately after the 5 years are up, you will have a lump sum to pay off some of the mortgage. And always ask for it to be set off against the capital.

Apologies if long-winded.

Jen
x

belfastgirl23

What makes you think it's coming off the interest? The interest is a fixed amount per month so anything you pay over and above that is bound to be coming off the capital isn't it?? Or is this an endowment mortgage thing? I'm assuming when your original term was 35 years it couldn't be interest only??

It seems to me that paying it off in 22 years rather than 35 indicates it must be coming off the capital.

ginalerd

feedtheram wrote: »

Hi all,

I have recently taken out a 35 year mortgage for £238,500 5yr Fixed Rate at 5.63%.

I was advised to overpay as much as possible so decided to do so. I phoned up my lender and requested my monthly payments go up to £1550 (from around £1300). The woman i spoke to told me she would send me something to sign and return - i didnt recieve anything to sign.

I did recieved a letter stating they had updated my account following my request and adjusted the mortgage term to 22 years.

After reading several different threads i am worried that this is not the correct way to overpay and i should have made a capital payment?

All i want to be sure of is that when i come to remortgage at the end of the fixed rate i have paid off as much as i can so the remortage amount is less and i can pay it all off quicker with less interest.

Could anyone advise if i have done the correct thing in changing the monthly payment?

On a side note: is it better to save up in a high interest account and make a lump sum overpayment once a year - or make smaller payments every month? i dont really understand how the interest is calculated on a fixed rate - i thought you pay the same amount of interest each month but that doesnt seem right thinking about it now.....:rolleyes:

in conclusion....i am very confused!

any help would be greatly appreciated

Many thanks,

James

Tell your lender that you want to pay the extra £250 per month, off of the capital amount and get them to confirm in writing your instructions! If you are wanting the mortgage to run for 35 yrs then why have they reduced the term to 22 this was not your instruction make it quite clear to them better still go in and ask them but always back it up in writing too.

feedtheram

Jennifer_Jane wrote: »

I am sure that this is coming off the interest not the Capital. I have an interest-only mortgage and pay off as and when I can (when it was fixed, it was limited to 10% repayment a year), and I discovered (on this website) that you had to let them know it was to come off the capital. So I always send a cheque and a letter clearly stating it must come off the capital.

The result is that my monthly interest payments have reduced, but the term has not. And the capital is down from £60000 to £17000. All this is confirmed in the letter they send to me each time.

So if you are interest-only, what has happened is that they have simply shortened your term and in 22 years you will still need to repay all the capital. Whereas before you had 35 years before you had to pay off the capital (and of course you would have paid considerably more in interest because of the longer term).

Rather phone them and ask if you can repay over 35 years with the extra every month going towards the capital not the interest. If they say that's not possible, then ask what the annual repayment allowance without penalty is, and for how long that will be in force (now my fixed mortgage is finished I can repay however much I like, so I assume for you it's 5 years).

Then put the (balance of the) repayment into a good ISA/savings so you have that for when the five years are up.

Best, of course, to do the arithmetic and ensure you're happy with this. It's not hard to do. I wonder why you didn't go for a repayment mortgage in the first place?

I think that answers all your questions - but to sum up: check if you will be penalised by overpaying annually; check whether it is in fact possible to overpay against the capital with the direct debit; then rather save the money you can afford ISA/savings until you have enough for an annual payment without penalty, and ultimately after the 5 years are up, you will have a lump sum to pay off some of the mortgage. And always ask for it to be set off against the capital.

Apologies if long-winded.

Jen
x

Thanks all for your responses.

Jen - sorry i wasn't clearer. It is a repayment mortgage, not interest only. I will call the lender and see what they say.

The terms state i can overpay by 10% per year, however it states that i need to do so via cheque and inform them when i do - this is what got me worried.

I am happy to have it as 22 years as long as i'm paying off the capital rather than the paying interest as some have suggested. The interest is calculated daily so from my understanding paying it each month rather than as a lump sum will be better as the interest will go down quicker, albeit by a small amount.

Anyway i will see what they say and let you know...finger crossed

Thanks,

James

laurar3

James, because you have a fixed rate mortgage if you paid off more than the 10% then you would face a penalty.

By reducing the term it wont affect the overpayment side of things and you will get savings from both reducing the capital and saving interest.

There is nothing stopping you in the future if it got too much extending the term should you need to. I think that this way it makes you overpay as sometimes it is too easy to not overpay it another bill came up.

Good luck with the overpaying, its not alway so easy is it.