Overpayments

stryker

Hi all. I am wondering how overpaying on a mortgage is of benefit as when september comes around, my provider ,(Barclays who set the rate once a year based on september BBBR)will factor any overpayments made previously into the repayment figure for the remainder of the loan. This will in effect not reduce the term of my mortgage but reduce the monthly payments slightly.

I dont want to reduce the term with my lender (by fixing a new term)but do want to have the flexability to pay extra when interest rates are low as i have a tracker mortgage which follows the Bank of england base rate + 0.23 %.:o

Kaz2904

If you pay by standing order then you will automatically reduce the term. If you are allowed to make overpayments then you will just be making an automatic overpayment every month.

dimbo61

Overpaying means you are reducing the outstanding mortgage balance each month as well as your normal mortgage payment so less debt and quicker you will be mortgage free.
BUT as you are now paying 3.23% on your mortgage I would be filling your cash ISA first and same for OH !
Savings rates are much better than your mortgage rate and will remain so for a while.
So cash ISA,s first , then high interest savings account ( over 3.23% after TAX ) then overpay whatever you can afford.
You can ask your lender to keep the mortgage payments static. GOOD LUCK

stryker

Kaz2904 wrote: »

If you pay by standing order then you will automatically reduce the term. If you are allowed to make overpayments then you will just be making an automatic overpayment every month.

Is that the case though?

I pay by direct debit. Bescause the base rate was 5% in september then that set the repayments at £595per month until sept 2009.(based on 5%) Now thst the interest rate is 3% i am automatically overpaying as long as the base rate stays below 5%

But...next Sept when Barclays review my payments, they will automatically take into account my overpayments and reduce the payments and not the term.

So will i have to keep making overpayments for the rest of the term?

MrMicawber_2

I'm a bit confused by some of this. You only need to make overpayments if you want to, so no you don't have to keep making overpayments for the rest of your mortgage term. The amount you need to pay is the monthly repayment to service the loan. Anything over this will reduce what you owe and will manifest itself by a shorter term or lower monthly payments - financially the effect is the same (all other things being equal) so it is a personal choice & swings and roundabouts.

What you might want to look out for is that if your mortgage is on annual review (and it looks as if yours is because your interest and repayments seem only to be re-set in September) you will be losing money. This is because your overpayments are just sitting on your loan not doing anything until September.

It would be better to put the money into a high interest savings until just before the end of September and then make a one off capital repayment to your mortgage.

Your repayments will reduce a bit as you say and then should you wish you can increase the amount you put into your savings account by the amount your repayments have reduced, so year on year you are able to save more and pay off more.

Sometimes there is a minimum limit on a capital repayment and this is commonly £500. Quite a few lenders will sit on any amount less than this so it is worth checking out.

stryker

Thanks Mr Micawber.

"Anything over this will reduce what you owe and will manifest itself by a shorter term or lower monthly payments - financially the effect is the same (all other things being equal) so it is a personal choice & swings and roundabouts."

I understand this and i do want to reduce my term by overpaying but, according to Barclays, i have to formally reduce the term with them to do this. If i overpay for say, 10 years then pay back the loan at enough to service the loan my monthly payments will decrease but not the term?

MrMicawber_2

Sorry - slightly confused - in your first post you say you don't want to reduce the term but in the last post you say you do want to reduce the term. Is terminology getting in the way?

I'm not familiar with Barclays. I have had mortgages with Portman and now Nationwide. Every time I make a capital repayment I can choose whether I want to reduce my remaining mortgage term or reduce my repayments. (I choose the latter because for some reason there is a charge for the former).

If you overpay for 10 years then your repayments will reduce a bit each year. Your last sentence sems to suggest you think your repayments wil only reduce after the 10 years have elapsed.

Regarding the precise conditions of your Barclays mortgage re reducing the term you need to check with them. It may be as simple as the default being to reduce the payments and all you have to do is to ask toreduce the term instead.

stryker

Sorry for the confusion.
I do want to reduce the term by overpaying when i have the funds available to do that. I am currently paying back 595pounds per month when i only need to pay back around 490/month.

But.

I dont want to decrease my term formally with the bank, ie.reduce the term to say 16 years ,just incase rates rise sharply and have to potentially struggle to pay the higher repayments.

MrMicawber_2

OK now I understand. Sorry if I've been a bit slow. I don't think you will have your cake and eat it, at least not without paying a fee. Why don't you go for reducing the monthly payments option. Your mortgage continues to reduce, the amount you pay off increases year on year but if you hit slightly harder times (because of interest rate rises or whatever) you can just stop making the overpayments. Meanwhile if you don't hit harder times you will end up paying the mortgage of much earlier than otherwise - and of course still save yourself a small fortune in interest charges.