Overpayments and mortgage lifetime

PuppetMaster_2

I already posted this in the Mortgage Saving Wannabe forum, but on reflection that was probably not the right forum. There's no move or delete option for the post, though, so here goes:-

I've a tracker mortgage which I've been overpaying each month. I requested that the overpayments should reduce the life of the mortgage and not the monthly payment amounts and I believe that I've shortened the mortgage life by about a year so far. My statements only show when the mortgage would finish assuming no change in interest rate or overpayment amount, so I can't be accurate on the exact lifetime of mortgage currently.

However, the initial 2-year period of the mortage is coming to an end and the tracker rate changes slightly - they've just notified me of the new monthly payment amount, and according to my calculations, this has reverted the life of the mortgage back to 25 years. Surely this isn't correct? I'll probably chase this up with the lender when I get a moment, but just thought I'd see what others' opinions were...

chuckalicious_2

Kind of new to this, but I think I can explain this one:

they are probably calculating how long it will take to pay off the mortgage at the new interest rate, based on the amount you are currently paying.

So although the overpayments made a difference with your old rate, it may make less of a difference with the new one.

I could be totally wrong about that, but I've just been reading up on this and it seems to make sense

VIGILANT22

PuppetMaster...How do you arrive at/ calculate the monthly payment to equate to the term of the mortgage...??

Is the interest rate they are quoting the SVR?

BoxerfanUK

I'm overpaying in a slightly different way.

I'm on a 10 year fix so am limited to paying off a maximum 10% in each calender year without penalty. As my BS (the Leeds) calculate interest annually I have to pay off a minumum £1000 each time for them to recalculate the interest immediately. Any less and although the overpayment gets accepted they won't recalculate the interest until year end.

Not sure whats the best way, but the way I'm doing it is that each time I pay off a lump sum I'm just letting my BS reduce the monthly payment but the difference I am then putting aside into a cash ISA and putting it towards other savings I am making to overpay 1K every 8 weeks. This gives me the flexibility that my capital owed is still coming down but as my repayments are coming down too if I were to hit a lean time or a bad month I have the money set aside anyway as my monthly repayment is lower.

Don't know if this all makes sense but ultimately although I am not asking the BS to shorten the loan term, because I am overpaying the capital is reducing more quickly than the term so in effect it will be paid off just as quick as if I asked them to reduce the term each time.

PuppetMaster_2

VIGILANT22 wrote: »

PuppetMaster...How do you arrive at/ calculate the monthly payment to equate to the term of the mortgage...??

I've made a spreadsheet with effectively the formula below:

Interest = [Prev_month_balance] x ([Interest_rate] / 365 * [days_in_current_month])

Then each month:
Balance + interest - payment - overpayment = New Balance

Just keep doing that until the balance is 0 and that tells you when the mortgage is finished. It's very useful to figure out how much overpayments affect the end date of the mortgage too. My spreadsheet is normally 1 or 2p out from my bank's monthly statement

Is the interest rate they are quoting the SVR?

It's not the interest rate I'm disputing, it's the monthly payment amount (and therefore, the life of the mortgage).

...although I am not asking the BS to shorten the loan term, because I am overpaying the capital is reducing more quickly than the term so in effect it will be paid off just as quick as if I asked them to reduce the term each time.

Thinking about it more, I've come to the same conclusion and I'm going to leave it. As I'm overpaying, it doesn't really make any odds - the mortgage will finish early anyway. And if I stop overpaying, it means my monthly payments are actually slightly lower than what I think they should be. So it's pretty much win-win.

For a bit more info, my overpayments effectively work as an offset mortgage - I can claim back any of my overpayments if I wish, or take payment holidays etc, but while they are there, they reduce the mortage capital.

VIGILANT22

I don't know of any lender who would send you a revised rate and extend your term without your permission??

techno12

PuppetMaster wrote: »

I've a tracker mortgage which I've been overpaying each month. I requested that the overpayments should reduce the life of the mortgage and not the monthly payment amounts and I believe that I've shortened the mortgage life by about a year so far. My statements only show when the mortgage would finish assuming no change in interest rate or overpayment amount, so I can't be accurate on the exact lifetime of mortgage currently.

Why did you request that? I'm similar to yourself, on a low tracker and overpaying (I pay the same fixed amount each month). Enjoying seeing the monthly amount I'm obliged to pay come down a little each month due to the overpayments.

If you tell them to reduce the term you'll be obliged to pay more if/when rates rise - far better to let the monthly payment reduce each month to soften the blow.

Plus as each month goes by you're actually overpaying by slightly more so it's a win-win situation, and keep up those fixed repayments and the term naturally reduces itself (mine is 19 years but if I maintain these fixed payments and rates stay at 0.5% it'll be paid off in 10 - though rates will rise so it won't be). All IMHO of course!

(edit - ah, I see from your long response above you agree with me. As I've said before all that really matters is your outstanding balance - far too many people are obsessed by the remaining 'term')

jrawle

PuppetMaster wrote: »

However, the initial 2-year period of the mortage is coming to an end and the tracker rate changes slightly - they've just notified me of the new monthly payment amount, and according to my calculations, this has reverted the life of the mortgage back to 25 years. Surely this isn't correct? I'll probably chase this up with the lender when I get a moment, but just thought I'd see what others' opinions were...

Even if this is the case, is it a problem? I know with Nationwide for example, during the tracker period, overpayments are limited, so if they reduce the monthly payment amount, this also reduces your ability to pay off the mortgage quickly.

Once your tracker ends, however, and you revert to the SVR, you can overpay as much as you like. So even if they calculate the new payments for a 25 year term, you can still overpay so as to pay off the mortgage more quickly.