Mortgage overpayment question

sjl1970

Hi,

I've just registered and this is my first post!!

I wonder if anyone can explain how mortgage overpayments work. I'm in the fortunate position (due to the falling interest rates) of being able to overpay my mortgage by £500 per month. When interest rates rise again I won't be able to afford this so would only be looking at doing this for approx 12-18 months depending on how quickly interest rates rise again.

All the overpayment calculators that I have seen show you the long term result of overpaying for the outstanding term of your mortgage - in my case 22 years, is there any way I can see the benefit over overpaying for just 12 months?

Even if I can't find this information I think I will overpay rather than save because at the moment I can't go onto another decent fixed rate as we're only at 86% LTV, I'm thinking the more mortgage capital I can get rid of will better my LTV next year i.e additional capital reduction of £6000 (£500 x 12) - obviously this will be wiped out of the house value goes down by £6000!!

Thanks in advance for you help.

Trying_to_be_good

Overpaying is good in general, good on you for being proactive as rates fall - you'll be in a much better position to remortgage.

First find out if there are any penalties for overpaying, and the maximum amount of overpayments you can make without penalties.

Assuming it's penalty free, check how your mortgage interest is calculated - the answer will be daily, monthly or annually.

If it's daily, overpay as soon as you can each month.
If it's monthly, overpay a week before the date on which the interest is calculated each month (to allow time for the money to arrive in your mortgage account).
If it's annually, save the money up somewhere else (e.g. regular saver) and overpay a week before the date on which the interest is calculated each year.

The amount you save depends on the interest you'd be otherwise paying, and the term of your mortgage. The rough calculation, assuming 12 overpayments of £500 is [£6000 * (1+interest rate)^mortgage term] - £6,000.

So, interest rate 5% and mortgage term 20 years equates to an interest saving of nearly £10,000 (by my maths).

m_13

Karl Jeacle's Mortgage Calculator is fantastic for this sort of calculation. If it looks complicated, then I promise it's not!

You don't put enough details for to work things out for you but on the overpayments page you can put in £500 overpayment from months x to y. You can either start now and put in how much you owe and run it for 22 years with months 1 to 12 or 1 to 18 overpaying £500 or you can start at the last mortgage payment and adjust the month numbers.

If you get stuck PM me your information and I'll calculate for you. I'll need to know how much you owe and the interest rate

Robert_Sterling_3

" Quote So, interest rate 5% and mortgage term 20 years equates to an interest saving of nearly £10,000 (by my maths). Unquote

I agree with your mathematics.

sjl1970

Thanks all for your help, I'll take a look at that mortgage calculator and do the sums.