Overpayment vs. capital repayment (ING Direct)

malross

Hi all,

I'm thinking about paying off a chunk of my mortgage early. However, on visiting my provider's website for details, they differentiate between "overpayment" and "capital repayment":

Your overpayment will create an 'overpayment reserve' which you can use to make underpayments if required. Any balance in your 'overpayment reserve' will reduce the amount of interest you pay but will not reduce your monthly payments or your mortgage term. Overpayments are non refundable. If you would like to make a 'capital repayment' to reduce either your monthly payments or your mortgage term, please contact our Mortgage Team.

All I want to do is reduce the overall amount I end up paying (over the full term). Whether the overpayment reduces my term or my monthly payments, I don't really mind. Which option would you advise I go for?

Thanks in advance,

Mal.

reck_uk

Hello Malross,

When I spoke to ING about this they told me that they only accept payments of £1000+ for reducing your capital. Anything less then this goes into their "overpayment reserve". Once your overpayment reserve reaches a £1000 you then have the option of using this to reduce your capital, but you need to ring them up and ask them to do this otherwise it stays in your reserve I believe.

I only wanted to overpay an extra £50 a month to reduce the term of my mortgage. So i've decided to stick the £50 a month into my isa and then when I get the £1000 use it to reduce the capital and bypass the "overpayment reserve" altogether.

Welshlassie

I think it depends on what interest rate you are paying and what savings rate you can get as to the best apprach. If you can get a savings rate above your mortgage rate (which is difficult these days, it put any OP's you want to pay into this and then when you are not earning more interest on your savings against your mortgage lump that off the capital.

If on the other hand you can't get a better savings rate pay it into the OP fund, this will reduce the amount of interest you pay over the term and if the payments are large enough you will automtically see a reduction in your term.

You'd be best off keeping your monthly payment the same as this helps to pay it off quicker.

HTH

Mathsguy

Well that doesn't make much sense...

If you make a payment and it is kept in your 'reserve' and that reduces the interest, but they do not reduce the term or the monthly payment then there will come a point where you will have a negative balance remaining to pay...

Perhaps they mean that the reserve is only there to allow for underpayments in the future, and works a bit like if you were making payments from a savings account with the same bank...

CLAPTON

I think it means the following although I agreee with mathsguy thats it doesn't make a lot of sense as written.

- if you make a 'capital payment' then they formally give you the options
a. do you want to reduce the term of the mortgage or
b. do you want to reduce the monthly payment
presumably they only want to go the the bother of this for a significantr sum of money.

If you 'overpay' they dont formally offer you the options but keep the monthly payment the same. If you continue to overpay and don't use the 'underpayment' option then inevitably the term of the mortgage will reduce.
This method does have the flexibility of allowing you to reduce your payments if you wish until you have used up the 'overpayments.... so this would be very suitable if your income is not secure and you may want the money back later.

bankbars

Hi malross,
I saw your quote. To take decisions on such topic always leads to confusion. But the first thing you need to do is to ask yourself, whether you want to pay low interest rates for life time or long term. or paying off the loan amounts. What's the use if you get to pay low interest for long term but your loan amount will never get reduced. If you want to chunk off your mortgage loan then Capital repayments is the best option for you.

Hope this suggest help to solve your problem.
Regards.

reck_uk

They told me any money in the reserve can be used in future to make underpayments but you can't withdraw the money once it's in. That's another reason why I decided to keep it in my own account until I built it up £1000+

MrMicawber_2

I think there are many different ways that overpayments are treated. I know of two others:

1) The money sits on the account and is capitalised at year end even if the amount is less than the one off 'capital repayment minimum' e.g. £1000 in the Ing case.

2) The money sits on the account 'forever' unless you increase the amount to meet the min cap repayment requirements. At this point it could either be capitalised right away or sit there until the next year end.

All sorts of variations so it is best to check.

However fundamentally an overpayment is not applied to the capital immediately whereas a capital repayment is. Although the word 'immediately' often means at the month end - so I always try to make any capital repayments a couple of days max before month end.