Calculating allowed overpayments

Lister_2

dimbo61 wrote: »

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.

Yep, £500 a month is ample for the moment, just thinking ahead in a few years when we might be able to overpay more than that. Thanks

blueberrypie wrote: »

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.

When I talk about a reduced term I don't mean the natural reduction caused by overpaying, I mean phoning up my mortgage company and explicitly asking them to reduce my term in order to make my "standard" monthly payments higher. I would only need to do this if I wanted to overpay more than £500 a month

blueberrypie wrote: »

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

No, I am thinking that if I request a reduced term, my standard payments will be higher each month, and I wanted to be straight whether this was a one way thing.

Kaz2904 wrote: »

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.

That's interesting, I didn't know that, thanks.

Kaz2904 wrote: »

As has already been pointed out, if you can't afford to overpay, don't.

Yup, don't worry. Like I said I'll be saving a bit more first I think :beer:

Thanks for everyone's comments. Much appreciated.

greenbee

Just make sure that you are clear to the bank that you want to pay off capital rather than interest.

I have had a regular overpayment set up on my DD for several years now (I still have it, even though I'm now on SVR - which right now means I over pay by more and more each month!), so I knew I'd always be overpaying a bit, but could make additional payments over the counter or by SO if I has some spare. And like herman, I can draw down my overpayments (well, the ones I've made since I had the term reduced). Each time I renegotiate my mortgage, I adjust the term so that the monthly payment at that point is what I can afford to pay each month, and then work back to overpaying again. I've cut about 10 years off the term so far!

Anon

It can make a big difference to the term - we have been overpaying £500 per month for the past year and it has taken 3 years off the mortgage term (ie now 22 not 25 years until it is all paid off). If we continue at this rate we will apparently be paid off in 10 years!

When I looked into this a while ago, I came across a useful spreadsheet so that I could keep track and also scenario build - it is available for free from: http://www.vertex42.com/ExcelTemplates/extra-payments.html (it is American so a few tweaks to change $ to £!).

Be careful to get your timings right on overpayments - overpay by more than £500 and the full redeption penalty kicks in.

Anon

MarkyMarkD

greenbee wrote: »

Just make sure that you are clear to the bank that you want to pay off capital rather than interest.

That does not make any sense at all.

If you over-pay, all you can possibly do is reduce the capital balance outstanding.

greenbee

MarkyMarkD wrote: »

That does not make any sense at all.

If you over-pay, all you can possibly do is reduce the capital balance outstanding.

You owe the bank two lots of money:

1. the capital that you borrowed
2. the interest that they are charging you on it

They informed me that they could take the overpayment against the interest owed, rather than reducing the capital. I understood this as follows:

If you just pay against the interest, they continue to calculate the interest you owe them against the full capital amount, and reduce the INTEREST you owe by the amount you have overpaid.

If you make a capital repayment, then the amount against which they calculate the interest reduces, and either your monthly payment can be reduced to reflect that (although a £50 overpayment on a reasonable mortgage won't have much impact), or you can opt to pay over a shorter period of time.

They may have mis-informed me, but the important thing is to be clear about what you want to do - which is to pay off capital as quickly as possible and keep your DD payments the same.

Anon

MarkyMarkD wrote: »

That does not make any sense at all.

If you over-pay, all you can possibly do is reduce the capital balance outstanding.

The overpayments come off the capital balance, it is what the lender does with the payments that is of value. You either choose for your monthly payments to reduce ever so slightly each month (by overpaying the interest each month is slightly less) or maintain the original payment amount, which results in the length of the mortgage being reduced. This is the choice that Nationwide give anyway.

Anon

MarkyMarkD

greenbee wrote: »

You owe the bank two lots of money:

1. the capital that you borrowed
2. the interest that they are charging you on it

They informed me that they could take the overpayment against the interest owed, rather than reducing the capital. I understood this as follows:

If you just pay against the interest, they continue to calculate the interest you owe them against the full capital amount, and reduce the INTEREST you owe by the amount you have overpaid.

If you make a capital repayment, then the amount against which they calculate the interest reduces, and either your monthly payment can be reduced to reflect that (although a £50 overpayment on a reasonable mortgage won't have much impact), or you can opt to pay over a shorter period of time.

They may have mis-informed me, but the important thing is to be clear about what you want to do - which is to pay off capital as quickly as possible and keep your DD payments the same.

No, they have mis-informed you.

You owe them one amount of money - the capital. And then each month, interest is calculated and added to the account. Then you make your payment, which covers all of the interest and maybe some of the capital.

If you overpay, as the interest has already been paid, there's only capital to overpay against.

greenbee

Looking back through my records, when I first made overpayments, part of my mortgage was interest only... they took the overpayment as a payment a payment on account agains the interest-only element, not as a reduction in capital. Hence the confusion...