have I got my maths right? Overpayments

matty_hunt

Hi.

I have a mortgage with nationwide. fixed 5.29%

I pay the full 'extra' allowance each month but I was just looking through the paperwork and the Early repayment charges are 3% of the amount repaid.

I don't know if I'm looking at this too simplisticly but if I make overpayments beyond my allowed £500 per month Id be paying a one off 3% instead of 5.29% pa which saves me money short term and long term, right?

If this is correct, given the interest rates on my bank acoount, it would pay me to overpay beyond my allowance, get hit by the 3% charge but save overall.

Many thanks if someone could confirm this

Cheers

matty_hunt

Doh, the 5.29% will be on a lesser amount each month so the maths is not so simple.

Robert_Sterling

Your mortgage is at 5.29%
You have got some spare money.
You would not easily be able to get 5.29% tax free interest on that money.
Suppose you pay overpay by £500 per month already.
There is no penalty for doing that.
Suppose you overpay an addition £500 per month.
The penalty is 3% immediately. i.e. £15
The reward is that your mortgage is reduced by £500 and the interest per annum goes down by £26.45 per annum.
So in the first year after you make the payment you save £26.45 -£15.00 = £11.45
In each subsequent year you save £26.45 per year.
After the first year it is like having this extra overpayment invested at 5.29% tax free.
For a standard rate tax payer you would need to get 6.6% from taxable savings to equal the 5.29% tax free.
For a higher rate tax payer you would need to get 8.8% taxable.
...............................................................................
I have made a few assumption but in a nut shell I would say
Overpay and accept the 3% penalty.

sloughflint

Robert_Sterling wrote: »

Your mortgage is at 5.29%
You have got some spare money.
You would not easily be able to get 5.29% tax free interest on that money.
Suppose you pay overpay by £500 per month already.
There is no penalty for doing that.
Suppose you overpay an addition £500 per month.
The penalty is 3% immediately. i.e. £15
The reward is that your mortgage is reduced by £500 and the interest per annum goes down by £26.45 per annum.
So in the first year after you make the payment you save £26.45 -£15.00 = £11.45
In each subsequent year you save £26.45 per year.
After the first year it is like having this extra overpayment invested at 5.29% tax free.
For a standard rate tax payer you would need to get 6.6% from taxable savings to equal the 5.29% tax free.
For a higher rate tax payer you would need to get 8.8% taxable.
...............................................................................
I have made a few assumption but in a nut shell I would say
Overpay and accept the 3% penalty.

I don't agree with your figures.There is in fact a loss in the first year:
Overpaying an extra £500 per month is equivalent to putting in a savings account paying 5.29% net.
The saved interest is approximately 500*6.5*0.0529= £171.92 in a year.

The penalty for overpaying this however is 3% of the amount paid so in other words £180.

In the first year there is a small loss but thereafter the accumulated £6000 is effectively being saved at a rate of 5.29% net.

In other words,considering you could save the extra money now at 3-4%, it'll take over a year to start benefitting.
Is it a short term fix rate?

dimbo61

Contact your lender and ask if you can shortern the term by a few years !
This will increase the mortgage each month and therefore you will have no ERC to pay.
Use "whatsthecost" to work out how many years you will need to reduce the mortgage to be paying say £500 extra a month ( if thats what you want to overpay )
I reduced my mortgage term from 22 years to 10 years and my payments went up by £500 a month
Saves thousands in the long run GOOD LUCK

apples1

I am also on nationwide repayment mortgage fixed rate 5.29% (expires June 09) and about a year ago I reduced the term to increase my monthly payments. Def the way to go for you too I'd say. I told them the amount I wanted to pay each month and they worked out what to reduce the term to to acheive that.

sloughflint

That's a neat little loophole. If that's allowed, then that's a far better way of doing it.
How strange that one way you get charged 3% and the other way you don't with an identical outcome: a shorter mortgage term.

getmore4less

sloughflint wrote: »

That's a neat little loophole. If that's allowed, then that's a far better way of doing it.
How strange that one way you get charged 3% and the other way you don't with an identical outcome: a shorter mortgage term.

There is the risk they decide to not allow you to increase the term should you no longer want to overpay.

You have the optional £500 to not pay first so potentialy not that big an issue

With this level of overpayment available make sure you have considered the long term benifit of ISAs(tax free for life).

sloughflint

getmore4less wrote: »

There is the risk they decide to not allow you to increase the term should you no longer want to overpay.

Yes that makes sense.Overpaying is flexible ( at a cost) but reducing the term, OP would need to be confident in being able to maintain those payments.

uzubairu

apples1 wrote: »

I am also on nationwide repayment mortgage fixed rate 5.29% (expires June 09) and about a year ago I reduced the term to increase my monthly payments. Def the way to go for you too I'd say. I told them the amount I wanted to pay each month and they worked out what to reduce the term to to acheive that.

That's what I have done on a few occasions (also on a fixed rate), and it is a great feature that it is free and easy to do.

I also overpay by about £700 each month without penalty.

matty_hunt

Hi.

Thanks to all that left a post.

As a follow up, I spoke to Nationwide, said I could overpay the extra £500 a month, every month and so would like it included as the 'normal' payment. No problem! They recalculated my term based on my current payment + extra £500 per month. This brought my term right down and allows me still to make £500 overpayments per month, And it was all done very easily. Spoke to the girl. Told her the amount I could pay. She recalculated. I sign the paper. All done, and for free!