Overpayment / Capital Repayment - what's the difference?

smeli

Hi

Can any of the many experts on this forum explain to me in simple terms what the difference is between an "overpayment" and a "capital repayment"?

My mortgage is with the Cheshire Building Society (don't know if other banks / societies operate differently but this one seems hell-bent on confusing the hell out of me). I always understood from making small "overpayments" in the past that they would only reduce the term of my mortgage if I was to make more than £500 overpayment. Fair enough - but presumably if I pay less than this it still goes off my capital? I've asked this question a couple of times but never got a straight answer off them (or I just gave up trying to understand ).

Last Summer I made a couple of large overpayments over £1k and both times they automatically sent me a letter setting out my new mortgage term. (One time they made a massive error by reducing it by about 7 years too much but eventually sorted that out!).

So this month when I went in and paid a cheque in for £1k I expected to just get another letter automatically sent to me reducing my term again. However it's been 3 weeks and nothing received as yet (and no reply to an email earlier this week) so I rang them this morning, and the lady explained that my £1k was on the system as an "overpayment", and in order to reduce my term they would have had to make a "manual adjustment" to make it a "Capital Repayment". Doesn't seem to be a problem in doing this now and then they will send me a letter out, but again when I asked what the difference is - i.e. what were they planning to do with my £1k if they weren't repaying my capital with it, I didn't get an answer just something about it being an overpayment (:( argh). And that if I want to overpay in the future and reduce my term then I have to explicitly tell them that I am making a capital repayment not an overpayment.

So can anyone tell me what the difference is, and confirm that I am better off in the long run reducing my term rather than my monthly repayments. And do all banks and building societies operate the same way? I really wish the Cheshire allowed these overpayments to be made on-line so I could see where my money was going straight away.

Also got another slight worry now - am I actually allowed to repay the capital? The terms of my current mortgage allow me to overpay by £5k a year without penalty- does that include capital repayments or not? As I said before I have tried asking them all these questions but they don't seem to answer me properly! I probably should understand because I have a maths degree and work in accounts so it is shameful really!

Many thanks if anyone can shed a bit of light for me

weezl74

how very odd! I can't see a difference myself at all

But yes, I'd say it's definately best to reduce the term rather than the monthly payment.

Snippa

Hi Smeli

A capital repayment and an overpayment are bascially the same thing. Both bring down the size of the mortgage, as you're paying capital. A normal mortgage payment is split between an interest portion and a capital portion - at the beginning, when the mortgage is large, it's almost all interest, then later on as it gets paid off, it's mostly capital.

So an overpayment can do two things: it can bring down the mortgage term, ie you pay it off quicker, or it can bring down payments if you stick with the same term. Usually they term it differntly on the size. So if you pay a small amount monthly it's an "overpayment" but if you stick a larger amount in, like £1K, it's a "capital repayment".

It sounds like your lender has maybe just changed the way they do things. Before they automatically re-calculated to bring the term down if you made a larger payment, and now they do it differently, and you have to specifically ask for that.

As long as you stick within what you're allowed to repay a year, you're fine. It's only a problem if you make a very large "capital repayment", as they would regard that as basically part paying off the mortgage early, which usually incurs penalties. If you're overpaying under your £5K amount, it's all coming off your capital - whatever name they give it!

Courgette

smeli wrote: »

I probably should understand because I have a maths degree and work in accounts so it is shameful really!

I'd say shame on them personally if you have a maths degree and work in accounts and still don't understand it!. I am permanently confused by Halifax and get a different answer to the same question every time I ask it. I think it's all part of them not wanting to encourage people to OP therefore making it seem like something really difficult.

Don't let yourself be put off OPing ecause you're not sure if you're 'doing it right'. Keep plugging away and in time you will get rid of the b^gger.

Good luck!

smeli

Thanks to the quick replies! They have definitely put my mind at rest :-)

That is a good theory Courgette, I did wonder why what they say doesn't match things I read about OPing, don't know why I hadn't suspected that they aim to confuse us before!
I hadn't thought it could be to do with them changing the way they do things either Snippa - perhaps they had as I did change my product in September and they were taken over by Nationwide last year, and other things have changed such as the amount we can overpay.

Joe_Bloggs

@Smeli
I have a Nationwide mortgage and I can view the situation online. Can you do this with a Cheshire mortgage ? In my case overpayments tend to alter the capital after three working days. Were I to make an overpayment of more than £500 I would face an early repayment penalty. Is the Cheshire Mortgage fully flexible in that you can make unlimited repayments without penalty ?
J_B.

Snippa

I think I have the same Nationwide one as you Joe. £500 per month is the maximum overpayment you can make (I dream of making that every month!) without penalty. The great thing is that mortgage interest is calculated daily, so every overpayment really is saving money straight away. The other thing I like with mine - which may be the same with yours smeli - is that they keep an account of "Overpayments" and if you ever need to get money back out quickly, you can take it back out of that without the hassle or re-mortgaging or taking a loan. With IRs this low, that seems to make more sense than saving into a savings account.

Jonbvn

They're basically the same thing. IIRC overpayments are kept in a separate account and can be returned to you on request, whereas capital payments cannot. This seems to be a common feature with several BS's.

hillcats

Jonbvn wrote: »

IIRC overpayments are kept in a separate account and can be returned,
whereas capital payments cannot.

Hmm, really is that a fact? Very interesting indeed.

smeli

Hi again

Joe Bloggs - nope I don't think I can view my mortgage details online - would be great if I could - am hoping the Nationwide will drag the Cheshire into the 21st Century on that one quite soon!
I can't make unlimited overpayments, only up to £5k a year (they seem to have reduced this from £10k on new products). However I think when I come to the end of this fix I can make an unlimited OP at the very end even if I go on to a new fix immediately - that is what they implied last time anyway!

Snippa - I've seen some mortgages with that feature where you can get back your overpayments if necessary but I don't think ours has that option so I just have to make doubly sure I won't want the money back - hence why I probably don't overpay as much as I could. Unless I have misunderstood more - what does IIRC stand for?

I shouldn't complain too much though as when we bought our house in April 2007 we had a 90% LTV. We've done quite a bit of improvements but even so with the house prices dropping I doubt we've got anywhere near 25% equity yet. I didn't want to go on the SVR (even though it was / still is only 2.5%) because when IR go back up we would have a job finding a half-decent rate. The good thing with the Cheshire is that they have a "loyalty" offer for existing mortgage customers to keep you with them which was basically our best option as the rate was much better than anything else we could have got and no arrangement fee either. So was relieved about that - I just have to trust they administer my OPs correctly!

daveybea

A slight clarification. An overpayment is just that - you need to speak to the bank and tell them you want it as a capital payment otherwise it can be used against the whole sum outstanding i.e capital and interest. Therefore the reduction in the capital sum owed has the effect of decreasing the amount of interest which is liable -hence how it's quite easy to reduce the mortgage term because of the reduction in interest charges. The Halifax in their small print say that underpayments can be made to the amount of the overpayments. I would if need be either ask for a payment holiday or extend the length of the mortgage if times get hard. I should also say it's worth going on thismuchiknow and using their
excel document to calculate your mortgage-it's incredibly accurate and has helped me in the numerous times when the Halifax has miscalculated
my overpayments!!!!