Calculating allowed overpayments

Lister_2

Our new fixed mortgage will allow us to overpay by £500 each month without penalty.

However, surely if I pay off £500 capital each month, my official monthly payment will come down, and therefore if I pay the same the next month I will go over my limit and incur charges.

Just wondered how others dealt with this. Do you just reduce your term if you are getting close to the £500 limit?

Cheers

JayZed

I pay my "official" monthly payment by direct debit - so the lender takes the correct required amount. I then overpay £500 by standing order.

(I also recommend reducing the term rather than reducing the monthly payment, but that's a separate question).

Welshlassie

The reason most people OP is to reduce their term and pay their mortgage off quicker. Most mortgages don't have the monthly repayment recalculated each month, normally annually. The mortgage payment is also usually direct debit therefore the bank has control over how much is taken.
If you can afford to OP £500 pay it, it shouldn't cause you to incur a penalty, but if you really want to put your mind to rest, call the bank and ask them

Lister_2

Welshlassie wrote: »

Most mortgages don't have the monthly repayment recalculated each month, normally annually.

Ah ok, didn't realise this. The interest is calculated daily so I assumed the repayment figure would get recalculated at the same time.

On the subject of shortening the term in order to increase your allowed payments, has anyone ever increased the term again afterwards? I can see in the future we will probably be able to overpay more so will have to reduce the term, but I'm just a bit worried that our monthly commitments will then be that much greater if something bad happens (redundancy etc). Just wondering if the mortgage company are likely to let us increase the loan term again.

blueberrypie

Lister wrote: »

Our new fixed mortgage will allow us to overpay by £500 each month without penalty.

However, surely if I pay off £500 capital each month, my official monthly payment will come down, and therefore if I pay the same the next month I will go over my limit and incur charges

Are you allowed to pay a maximum of £500 *including your regular payment*, or a maximum of £500 *in addition to your regular payment?

If the latter, it won't make any difference to how much you're allowed to overpay next month - it will still be £500.

As others have said, your regular payment won't usually get your regular payment recalculated immediately - sometimes it will if it's more than a certain amount, sometimes it will annually and sometimes it won't ever. You'll have to ask your lender to find out how they do it.

blueberrypie

Lister wrote: »

On the subject of shortening the term in order to increase your allowed payments, has anyone ever increased the term again afterwards? I can see in the future we will probably be able to overpay more so will have to reduce the term, but I'm just a bit worried that our monthly commitments will then be that much greater if something bad happens (redundancy etc). Just wondering if the mortgage company are likely to let us increase the loan term again.

It's not as simple as overpayment = shortened term. It's more that overpayment = less owed, therefore mortgage ends sooner. So in order to increase your term again, you'd either have to renegotiate your mortgage (which you might not want to do if money was tight), or take a payment holiday (which your lender might or might not allow).

That's why it's recommended to have enough savings to live on for a few months *before* you start overpaying your mortgage.

Lister_2

blueberrypie wrote: »

Are you allowed to pay a maximum of £500 *including your regular payment*, or a maximum of £500 *in addition to your regular payment?

If the latter, it won't make any difference to how much you're allowed to overpay next month - it will still be £500.

Yup, in addition to.

I was erronously thinking that it would all be one payment, whereas of course you are all correct in that my standard payment would be by direct debit, and I would have to make any overpayments separately.

blueberrypie wrote: »

It's not as simple as overpayment = shortened term. It's more that overpayment = less owed, therefore mortgage ends sooner. So in order to increase your term again, you'd either have to renegotiate your mortgage (which you might not want to do if money was tight), or take a payment holiday (which your lender might or might not allow).

That's why it's recommended to have enough savings to live on for a few months *before* you start overpaying your mortgage.

Yeah I see I think, thanks.
We already have three months of my salary in emergency savings, but with a reduced term mortgage that would get eaten pretty rapidly, so I think we'll probably save some more first before shortening the term.

Thanks again.

dimbo61

You dont need to shorten the term you just overpay and £500 a month is £6000 a year !
Then if things get tight you just stop the overpayments for a few months.
You have control and you will soon have a much smaller mortgage if you pay £6k on top of your normal payments.

blueberrypie

Lister wrote: »

Yeah I see I think, thanks.
We already have three months of my salary in emergency savings, but with a reduced term mortgage that would get eaten pretty rapidly, so I think we'll probably save some more first before shortening the term.

Thanks again.

Your reduced term - the one that came about because you made some overpayments - wouldn't make your regular payments any higher than they are now.

Are you thinking that if you decide to overpay by £500 each month, you have committed to paying that *every* month?

Because you haven't. All you've done is make an overpayment. The next month you can go back to whatever your regular payment is.

In other words, you could overpay by £500 in January, February, March, April, pay nothing more than your regular DD payment in May and June, overpay in July, regular DD in August...etc.

And if you did find money tight at some point, you'd be in the same position as you are now, as far as your regular commitment to your mortgage payment is concerned - the figure would be just the same.

I think most people feel you should have more than three months' living expenses in your savings though, so you might want to add a bit more to that first.

Kaz2904

When you make your overpayment, you may be asked if you want to shorten the term or the monthly payment. If you say you want to shorten the term, your monthly payment will remain the same. It won't matter how many overpayments you make, you will always have the same minimum payment until your tie in ends. BUT, each and every overpayment you make will shorten your term.
As has already been pointed out, if you can't afford to overpay, don't.

herman2811

Something else to bear in mind:

Don't know if this applies to every lender, but with mine, all the money I have overpaid goes into an "overpayment reserve", which I can take back if I need to. So it's nice to know there's money there if I need it.