Do overpayment reduce the monthly payment if you're on a fixed rate?

arthur_22

I am considering a fixed rate for five years. If I lock in at a five year rate does that mean that any overpayments I make, or one off lump sum payments I make, won't reduce the actual monthly payment I have to make? In other words, they'd be a bit pointless?!

Thanks for any help.

ineedhelp2008

It won't reduce the monthly payments, but will reduce the mortgage term

HarveyGal

It depends on your deal. I have a 5-year fixed rate mortgage and my overpayments reduce the capital and hence reduce my monthly mortgage payment.

The fixed rate means your interest rate is fixed. I believe that, for some lenders and in certain deals, the customer who makes an overpayment can ask their lender to reduce the monthly payment or the mortgage term.

Some folk make overpayments and insist their monthly payment stays the same (so reduce their mortgage term) as they know they can afford the amount they are paying each month.

Check with your proposed deal - I think many deals allow an overpayment (of, for example, 10% per year) without incurring any Early Repayment Charge. Do check this as if you can afford to make overpayments, the ERC can be a nasty shock.

Good Luck

Crinz

Well said HarveyGal,

You have a fixed interest rate, not a fixed payment. your payment can go down if you overpay your mortgage and can go up if you fall into arrears.

The certainty you have got is that the interest rate used to calculate the monthly payment wont change

redpete

arthur_22 wrote: »

In other words, they'd be a bit pointless?

As others have said, the effect on your monthly payments depends on the ts&cs on your mortgage. But overpayments are not pointless even if the monthly payments stay the same because you will be reducing the period of the mortgage and in either case reducing the total amount of interest you will be paying the lender over the whole period.

Doshwaster

On my mortgage overpayments by default reduce the monthly bill but you can ask them to reduce the term.

It's a tricky calculation but if your mortgage is currently affordable then you are usually better reducing the term - despite the temptation to reduce your bill. You won't see any benefit immediately, but you will be grateful when it is paid off a few years early.

My current plan is to overpay by £2000 or so each year in a lump sum.