Nationwide - overpay the full £500?

financialbliss

I normally just lurk in this mortgages and endowments board – I have a mortgage free diary in the mortgage free wannabe board, but I thought I’d post this here for wider coverage on the question (I’m also posting this in my diary).

Background.

• I have a repayment mortgage with Nationwide – 5 year fix at 4.79%. This now has just 15 months of the fix remaining (Jan ’10 to Mar ’11).
• I have already overpaid about £21,500 and can borrow this overpayment reserve back from Nationwide if required.
• I’m expecting to start 2010 with a mortgage balance of £48,500.
• If I do not re-mortgage to another provider, I’ll drop onto the Nationwide BMR at 2% above BoE rate, ie BMR rate of currently 2.5%
• Savings are split between Nationwide eSavings (0.45 nought point four five percent) and Egg savings at 3.25% (may well be lower now) – total about £9k. Could argue that I have about £30k in savings (£9k + £21,500 in the mortgage account as an offset that I can get back, but not so easily).
• No other credit / debt except mortgage and not expecting to make any large purchases in the next 36 months.

Objective
I aim to clear my mortgage on or before 12/12/12.

I have recently been paying around £1,025 (standard payment £898.03) and from January ’10 I was going to up the total payment to £1,100 (£898.03 + £201.97 OP) – about the ceiling of what I can afford per month without dipping into savings.

However, faced with low savings rates, I’ve been pondering over making the full £500 overpayment that Nationwide allows, ie £898.03 + £500.00 = £1,398.03 for the 15 months I have left on the fixed rate.

This extra £300 / month would need to come from savings - £300 x 15, ie £4,500.

I’ve gave some numbers here:
http://spreadsheets.google.com/pub?key=tApYHqBleG_rX1CS9TpuKCw&gid=1

Note: To place “safe” regarding interest rates, I’ve put myself on a 7% mortgage rate from April 2011, then added 1% per year until the mortgage is cleared. Hopefully a worst case scenario and won’t be any worse than that.


Left block shows continuous payment of £1,100 until the mortgage is cleared – March 2014.

Right block shows full £500 overpayment from Jan ’10 to Mar ’11, reverting to £1,100 until the mortgage is cleared – September 2013.


Pros.

• I can reduce the term of the mortgage by 6 months.
• I can reduce the mortgage interest from £6,675 to £5,400 ie by about £1.275, ie making better use of savings.
• £500 is a voluntary OP – I can stop this at any time, ie I’ve not committed to shortening term / higher monthly payment excluding OP.
• Despite stopping £500 after 15 months, the compound interest effect still has a benefit for the remainder of the mortgage.

Cons.

• Higher risk strategy – approximately halving savings from £9k to £4.5k.
• Should I re-mortgage away from Nationwide, then the £21,500 + new £4,500 in Ops becomes inaccessible, but that would be the case anyway irrespective of an additional £4,500 in the pot.

Should I ramp up the overpayments to £500 or not?
Is there anything I’ve not thought about?
Anyone else been in a similar situation and what did you do?

Many thanks,
Financial Bliss.

kinglewis

I think it sounds like the right thing to do. Worth ensuring that you have 3-6 months salary/outgoings in your savings in case of a financial emergency.

davies0121

If you really want to clear off the mortgage, your best bet it to put all you can towards it but as already mentioned, you need to have your emergency pot available?
I am in the same boat as you, Nationwide mortgage and OP £500 a month. I know I could stop at any point if the worst happened PLUS I'd have a large OP pot that I could use as my emergency pot (plus I have 3 months on the side too!)
The other question is - if you are so close to finishing your mortgage, why would want to re-mortgage with anyone else? If the rate stays at 3.49%, just pay it off sooner and be safe in the knowledge, you have a pot sitting there if required. Your savings rate are lower than the mortgage after all!
This would really help you towards making your goal too!
Get rid of the mortgage, feel fantastic and start putting money back into the savings pot! Wish I was as close as you! (Currently hitting the £100K mark - down from £108K 2 years ago)

financialbliss

davies0121 wrote: »

I am in the same boat as you, Nationwide mortgage and OP £500 a month. I know I could stop at any point if the worst happened PLUS I'd have a large OP pot that I could use as my emergency pot (plus I have 3 months on the side too!)

Thanks for the reply. My thinking is that I could draw on the existing overpayments should an eventually arise that needs it, but in my mind, there's still a risk that I'm reducing my emergency pot.

davies0121 wrote: »

The other question is - if you are so close to finishing your mortgage, why would want to re-mortgage with anyone else?

This would really help you towards making your goal too!

I had the thought of an offset mortgage at the end of this current 5 year fix. Trouble is that I need to wait 15 months until I can re-mortgage and start down an offset path. Upping the OP to £500/pm from savings is effectively treating the Nationwide mortgage as an offset, but before the 15 month tie-in is up.

I should be paying around £425/month to the mortgage. I've shortened the term 3 times to up the standard payment, plus I overpay by as much as I can as and when. Chances are that if I up to £500 OP, I'd not re-mortgage away from Nationwide in 2011.

davies0121 wrote: »

Get rid of the mortgage, feel fantastic and start putting money back into the savings pot! Wish I was as close as you! (Currently hitting the £100K mark - down from £108K 2 years ago)

Thanks again,
FB.

davies0121

I had the thought of an offset mortgage at the end of this current 5 year fix. Trouble is that I need to wait 15 months until I can re-mortgage and start down an offset path. Upping the OP to £500/pm from savings is effectively treating the Nationwide mortgage as an offset, but before the 15 month tie-in is up.

I think the idea of an offset mortgage is a very good idea. I have been looking into this when my 5 year fix finishes.
I know you don't have to be reminded of this (as I'm a big fan of your MFW diary), Upping the OP to £500/pm will be reducing the interest paid over the next 15 months. Unless you can find a savings account that pays 4.79% (after tax) then OP is your best option. Just remember that your emergency pot isn't decreasing, it's simply moving from one account into another and working harding for you.
With regard to the OP pot with Nationwide, I have heard that people have got their money back out within a week. It may not be instant access but it's close enough!

I hope this helps!

Dan_1976

I would pay the £500 you are allowed, but I would maybe increase my pot of money first as some lenders are being a little tight with allowing people to borrow back. Nationwide are a good lender with a good rep so I doubt it would be a big issue.

I like your planning, so many people look ahead with small rate increases or unrealistic guesses! Good work!

Ps. This time next year BOE with be at least 2%

Charterhouse

I'm not sure if you are a regular or higher rate tax payer but it's worth remembering that the 4.79% you are saving is equal to at least 5.99% (basic rate) or 7.98% (higher rate) that you would need to earn in your savings account to be equal. I would recommend going for it at least to start with - as interest rates rise if there is a more attractive home for your savings you can always change your mind later on. Right now paying the full £500 is the right thing to do.

For reference this is one reason that I do not believe Nationwide mortgages are as attractive as many other fixed rate deals that allow you to overpay up to 10% per year at any time, although their low SVR is obviously a good point (although not one accessible to new borrowers).

uzubairu

Charterhouse wrote: »

For reference this is one reason that I do not believe Nationwide mortgages are as attractive as many other fixed rate deals that allow you to overpay up to 10% per year at any time, although their low SVR is obviously a good point (although not one accessible to new borrowers).

How do you work that one out?

If (for example) you had a £50,000 mortgage you would still be allowed to overpay £6,000 (£500x12) with no hassle/fees and reduce the term to overpay even more.
10% per year would be less.

The problem I see with a 10% per year limit, is that each year the mortgage reduces, so does the 10%.
Nationwide is £6,000 per year regardless.
With a larger mortgage, you could reduce the term as well to make larger overpayments (which is what I've done this year).

I'm on a fixed rate of 4.79% with the Nationwide.
With savings rates being what they are, the best place for my money (including emergency funds) is the Overpayment Reserve, because I can access them relatively easily if I need to and save interest whilst I don't.