Mortgage overpayments

cath-w

I wonder if anyone can help?

We are looking at taking out a mortgage (sold a house some years ago and just moved back from abroad so not our first mortgage).

Anyway, what I want to do is overpay the mortgage each month. Either directly or by a lump sum on the anniversay of the mortgage, depending on the details of the mortgage we take out. This will help us clear the mortage quicker and save a lot in interest.

Does anyone know of the formula that I can use to calculate how much this will affect the mortgage payments year on year? Simple mortage calculators cannot do this.

What I would like to do is work out how much difference an overpayment will make, e.g. if paying a 100 extra a month rolls over to x amount in 25 years and paying 150 extra works out at x*2 over 25 years then I can start to look at ways to increase the overpayments.

Also, if you have a mortgage for 100k and your monthly repayments were approx 600 and you then paid off 20k in a lump sum. Would your monthly repayments be recalculated to account for the fact that you now owe less on the mortgage? So after paying the lump sum off would your monthly payments say be 510 a month? (just made all the figures up for an example so they will not calculate at all). If so I can over pay by x in year 1, then in year 2 my monthly payment would be reduced and so at end of year 2 I can overpay by x as in year 1 plus the money saved on the monthly payments in year 2. In year 3 I can over pay by x in year 1, plus the extra saved on the monthly payments in the difference from what I was paying in year 1 to year 3. Is this how it works?

Thanks for any help and hope my post makes sense
C.

lisyloo

Are you talking about an interest only mortgage or repayment.

If interest only then I can provide some formuals.

If repayment then you need a spreadsheet because each seperate month need to be calculated individually.

A spreadsheet would be the ideal solution because then you can play around with it as you say.

Are you familiar with Excel?

Also, if you have a mortgage for 100k and your monthly repayments were approx 600 and you then paid off 20k in a lump sum.  Would your monthly repayments be recalculated to account for the fact that you now owe less on the mortgage?

Usually yes, but it depends on what type of mortgage you have.
Not necessarily.
Be careful to distinguish here between charges and payments.
If you have daily interest calculation then the mortgage is calculated daily and the interest CHARGES will be modified on a daily basis according to the capital.
However if you have annual interest calcualation (less common now) then your interest may not be calculated until the next year.
Whether your repayment is changed depends on your lenders policy (you need to check). BUT just because your repayment doesn't change doesn't mean you are gettting charged the same interest (be careful to distibguish).

So after paying the lump sum off would your monthly payments say be 510 a month?

Not necessarily.
Just because you have reduced your capital does not automatically reduce your monthly payment.
Again you would need to ask your lender.
Some will automaticall adjust your monthly payment, others won't and you have to ask (I would ask anyway to make sure).
So it's possible for the interest to reduce and monthly payments to stay the same i.e. you end up overpaying.
Often lenders will adjust your payment if the lump sum is over a certain amount e.g. £1000, but you need to check these things with YOUR lender as there is no hard and fast rule.

In year 3 I can over pay by x in year 1, plus the extra saved on the monthly payments in the difference from what I was paying in year 1 to year 3.   Is this how it works?

Yes, you are right. It's like compound interest in reverse.
That's why a spreasheet works well because it isn't a straight formula, there's some compounding going on.

I have a spreadsheet in which I use the PPMT and IPMT functions of Excel (for a repayment mortgage).

I think you'll find it very wothwhile to do a spreadsheet as it'll help you understand a lot more.

david78

cath-w,

Here are the formulae you need for a repayment mortgage. You can either put these into a spreadsheet or use a calculator. (a spreadsheet is much easier).

Notation:

Let:

B0 = mortgage amount (loan amount)
m = term of mortgage in months (e.g. 300 for 25 year term)
r = interest rate as a fraction (e.g. 0.05 for 5%)
P = normal monthly payment amount
OP = overpayment amount each month (so the new monthly payment is P+OP).
m2 = new term in months with overpayments
I = total interest charged with normal monthly payments.
I2 = total interest charged with new monthly payments
I-I2 = interest saved

calculation of monthly payment:

P = B0*(r/12)/((1+(r/12))^m-1) + B0*(r/12)

calculation of new term with overpayments:

m2 = log(1+B0*(r/12)/(P+OP-B0*(r/12))) / log(1+(r/12))

calculation of interest saved:

I = P*m - B0

I2 = (P+OP)*m2 - B0

Interest saved = I - I2 = P*m - (P+OP)*m2

Hope this is helpful. If you need further clarification just post back. There should be a spreadsheet version of this available for download sometime, not sure when though.

I should point out that I have assumed "daily calculation of interest". If your lender uses "annual rests" then forget about increasing your monthly payments, or move your mortgage.

** Edited: Have corrected the last formula for the interest saved. Previously it returned a negative value **

david78

An example of using the above formula might help you to check your spreadsheet.

B0 = £50000
r = 0.06 (6%)
m = 300 (a 25 year mortgage, 12*25 = 300)
P = £322.15
OP = 36.06 (overpay by £36.06 per month)
m2 = 240 (i.e. pay off mortgage exactly 5 years early)
I = £46,645.21
I2 = £35,971.73
Interest saved = £10,673.48

david78

liysloo,

I have avoided using the PPMT and IPMT functions because not everyone has Excel. Of course people can use these if they want and understand how to use them.

cath-w

Thanks for the information. David78 that is exactly what I was looking for. Right off to crunch some numbers.

C.

DiggingOut

Also you asked if an overpayment would result in the recalculation of payments, resulting in a lower payment in succeeding years. The answer is that it depends on the lenders and which mortgage you have.

Some recalculate once a year, or when rates change. Some recalculate every time you make an overpayment. Some recalculate if your overpayment is over £500. Some recalculate if you sneeze, I think, while others recalculate when you pay off the last payment. ;D

Mortgage_Master

Hi,

It's basic but you're welcome to have a play around with this spreadsheet if it's any use.

Simon

itslougher

Cheers Simon,

Just what i was looking for, don't suppose you have one with an attached graph showing the effect of early payments as well do you?
Got a lazy wife.... honest!

Cheers
Gav

Mortgage_Master

I did have somewhere, I'll have a look and get back to you.

Turbo_4

I found the Australian Yahoo site quite useful for seeing the effects of overpayments (just enter your amounts as they are in Pounds even though it is set up for Dollars)

http://yahoo.infochoice.com.au/banking/calculate/extra-repayments.asp