First Mortgage

F1rsttimemortgage

Evening All,

I am currently in the middle of buying my first house and hope that everything will be completed in the near future. Due to the high house prices i am currently going to go on to a 90% Fixed Rate Mortgage however i am trying to understand exactly how overpayments on the mortgage work as i am keen that when the mortgage next comes up for renewal i can move to an offer with a lower LTV.

Currently i will have £250 free per month that i am considering overpaying in to my mortgage. I had a conversation with the bank and they have confirmed that each time i make an overpayment my monthly direct debit amount will be reduced and i had a couple of points i was hoping to clarify:

• Am i correct in thinking that the overpayment is applied to the debt and you make a saving by not having to pay interest on that amount as it has been repaid? This would therefore mean that when i come to remortgage i should be able to get a better deal as i would have a lower LTV (providing house prices don't fall!).
• Does the bank reduce the monthly direct debit amount to ensure that the mortgage is not paid off before the agreed term of the mortgage (25 years for me)?

I appreciate that it seems a bit early to be asking this question however i currently have an investment that i am paying £250 per month in to and i am trying to figure out where i will potentially get the better return!!

Thanks very much in advance for any help that anyone can offer me!

Lokolo

Point 1) Yes

Point 2) Yes, but I believe some allow you to change to taking time off and keeping the DD the same (I think)

F1rsttimemortgage

Thanks for the quick reply!

Yeah i thought that some would allow you to reduce the term. I think i will call them back as the person i spoke to told me they had to reduce the direct debit to ensure that i didn't overpay by more than 10% in the year! If i was going to make the overpayment then i would ideally like to keep the direct debit at the same and therefore repay the mortgage quicker and therefore cut down on the compound interest!

ViolaLass

F1rsttimemortgage wrote: »

I think i will call them back as the person i spoke to told me they had to reduce the direct debit to ensure that i didn't overpay by more than 10% in the year!

That's nonsense. All they have to do to stop you overpaying by 10% a year is not accept payments that year once you overpaid 10%. Reducing your direct debit will simply ensure that the mortgage keeps going for 25 years and unless they are doing a clever calculation (which I doubt) then it will have nothing to do with stopping you from overpaying too much.

So, you want to ask the bank whether you can put a note on your account so they don't change the direct debit when you overpay (if you want - it will mean your mortgage comes down quicker) or whether you have to call them every time you want to make an overpayment to tell them not to change the DD and you want to ask how much you're allowed to overpay and whether there are any penalties and what they are.

You should also check that you couldn't earn more interest on your savings than you are paying on teh mortgage (unlikely in your case).

F1rsttimemortgage

Cheers Violalass.

Yep i'll give them a call back to get some clarity on the overpayment situation as i think ideally i would be looking to keep the Direct Debit the same.

Its a fair point about the savings account although as i'm on the 90% mortgage i have a rate that is higher than the savings account. What i am trying to calculate is what is the potential gain from my investment compared to the potential savings of not paying the compound interest on the and the lower interest rate i'd be on with a lower LTV in 5 years time when my fixed rate ends! Not easy when your trying to guess what the share price off my investment will move to compared against where the mortgage rates will be lol

ViolaLass

So you're going to be paying the mortgage with money from shares? Have you sought independent financial advice?

Also, you don't pay compound interest on a mortgage, just interest. You pay the interest (and some capital) every month so the mortgage can't then earn interest on the interest or your loan would increase.