Overpayment has reduced standard monthly payments!

pozalina

I have been overpaying my mortgage by £100 pcm for the last year. This year I decided to increase this to £130 pcm, so the mortgage lender wrote to me, confirming this.

In the letter they stated that my standard monthly repayment is now less than my original one (by £30 pcm), which worried me that they had reduced my repayments instead of using them to pay off the loan.

I phoned them and they reassured me that the repayments *will* have reduced my loan, but that the standard repayments have dropped because they recalculated how much I owed when I altered my overpayment amount.

I don't understand these things, but can anyone tell me if this means that I'll be repaying back at a slower rate than before I upped my repayments (It means I can overpay less a month!) Sorry if I'm being thick!

thanks v.much.

cloud_dog

Poz, most mortgage companies re-calculate the monthly repayment amount on an annual basis. This should not be confused with re-calculating your interest (assumes mortgage provider calculates interest daily).

Assuming you have £100k mortgage @ 5%, paying interest only (just for the example). Your monthly repayments will be £416.67, assuming you repay £550 each month you will be reducing your outstanding balance by £133.33 each month. The interest you owe in month two will reduce slightly because you have reduced your o/s balance (slightly). So, based on the slightly reduced balance your interest charge (on £99866.67) would be £416.11 - a reduction of 56p :j

It is not really worth reducing your Direct Debit amount by this much so the lender continues to take the original amount. After 12 motnhs payments your o/s balance has reduced to £98400.04, and lets assume that this coincides with the lenders annual repayment re-calculation then your monthly payment would be reduced to £410.

It depends how your lender takes your payments / overpayments but to answer your question, the reduction of the monthly payment will extend the time to repay your mortgage. So, if you can afford it / want to continue then you need to increase your overpayment slightly. Some lenders do have the facillity to allow your payments to remain set irrespective of the reduction due to overpayments, etc. The other way is to set up a Standing Order from your bank account so you can control how much extra you overpay, i.e. if the mortgage payment reduces slightly increase the SO by a similar amount.

(apologies for the essay)

cloud_dog

Joe_Bloggs

If you overpay your lender then they have the option to :-
1) Reduce the term of the mortgage.
2) Reduce the monthly repayments, keeping the term the same as before.

Request your lender do either 1) or 2) . Read the terms and conditions to avoid overpayment penalties. Monthly repayments are often recalculated annualy or when the BoE changes rates for a tracker mortgage.
Some lenders have monthly limits or annual limits to overpayments. In the later case they may have a specific month when overpayments will count against the capital. The terms and conditions are not all the same for all lenders.
J_B.

MikeLB

My understanding is that the lender will almost always reduce the basic monthly payment in accordance to the overpayments you have made, basing the new 'Basic' Monthly payment on the fact you may stop making any overpayments for the rest of the agreement at any given time. The term of your mortgage can only be reduced if you write and request this change to your agreement with them.

david78

This is quite normal. What you need to do is up the payments each year if you want to be sure to overpay. If you let them re-calculate a lower monthly amount, they will claw back some of the interest you have saved.

frible

This seems typical of the way mortgage companies treat us, they will always select the option that serves thier own purposes best. Whenever we make an overpayment, we always speak to customer services first to ensure they "spend" OUR money the way we want it spent. Never assume they will do what's best for you.

Broken_hearted

I would want the term not the payments reduced.

cha97michelle

Our mortgage provider tried to do this too, so i rang them back up and asked them to put it back up to the previous amount.

Now, every time i do make an overpayment i will make sure that i say that i do not want the payment reduced, and can they make sure that is put in my records. It hasn't been a problem since.

Xbigman

When I paid my 10% lump sum to C&G I recieved a preprinted letter to send with the next lump sum where I could tick the option I wanted (IE reduce term or payment). I just hope I can find it next January
Regards



X

Hawksmuir

At this moment in time we are using our overpayments to reduce the standard monthly payment, we are doing this untill the monthly payment is a figure that can be covered by either only my wage or Mrs H's wage (just incase something happens e.g. redundancy etc.).

Once the standard payment has reached this lower level, we will then overpay to reduce the term.

brranger

oh I like your thinking Hawksmure.