Alliance & Leicester Flexible Mortgage - Overpayment confusion!

IMF2000

Hi there, (first post! :money:)

"Alliance & Leicester Flexible Mortgage - Overpayment confusion!"

The documentation supplied with the aforementioned mortgage states:

"Overpayments of £500 or more
If you make a capital payment, that is, an overpayment of more than £500, the amount you owe, and so the amount of interest you pay, is recalculated and reduced immediately. This provides you with the benefit immediately."

In a leaflet titled "Your flexible mortgage guide" it states:
"How is interest charged? ... we work out interest on your mortgage loan every month, based on the amount you owe at the end of the previous month."


That aside, I have been overpaying my mortgage by £500 every month. It turns out that they have not been applying my overpayments as 'capital repayments' but treating them as simply 'overpayments'.

One day I phoned up as I noticed that the interest I am charged each month did not appear to be reducing. The monthly payment that they say is required each month was remaining the same (slightly lower than the actual figure they were taking as two overpayments were applied as capital repayments) but the statements advise that it would be paid off sooner and that I had X credit facility available.
I was advised then that my payments had not been applied as capital repayments and the call centre worker emailed the 'capital repayments' team.
I got a letter through today saying that my overpayments have now been applied off the capital and £36 in interest was also credited off the balance remaining!

I phoned them up once more just to check the amounts and was finally told that I would need to phone them up each month in order to have my regular overpayment applied as a capital repayment!

This seems at odds with what was stated in the original mortgage offer (stated above)?

Can anyone else explain what is happening as the call centre workers are being very cagey about it all. I phoned up once more and was told that I would be better off phoning up each month and getting it applied as a capital repayment..

I have scoured all the documentation I have but the above practice is not referenced. I have written a letter back to the agent in the capital repayments team..

I can't see what is happening, it seems that they are applying the overpayment to the balance (as shown on the statement) but not recalculating the interest (perhaps until the end of the year?) Either way I guess they make more money in interest and this is why I am finding it so hard to get a clear answer!

In theory I believe the monthly amount I am required to pay each month is now reducing but they are still taking the same original figure, ergo paying ever increasing amounts of capital off rather than interest..

lee_d_m

Hi,

I had a similar conversation with A&L today regarding my mortgage with them, I'm on their SVR, Interest only, but it would seem I was told similar to you.

This is what they said:

If you overpay by upto £500 per month, interest is calculated monthly, but your monthly payment will not change until the end of the year.

If you paid over £500, interest would still be calculated monthly, and your monthly payment would also be recalculated monthly as well.

Now, please don't take this as correct as I'm still tryng to verify it myself, but this is what they told me and it does kind of make sense.

Regards,

Lee

blueberrypie

What is your goal? Are you wanting to have your mortgage paid off sooner, or are you wanting to reduce the required monthly payment?

If you want your mortgage paid off sooner, keep paying the overpayment but don't phone them up and ask them to apply this as a capital payment. What will happen is that the interest will be reduced from the following month, but as you are still paying the same monthly payment (apart from the overdraft). You will thus be paying more and more off the capital every month.

The required monthly payment will probably be re-calculated once a year or so, but in the meantime, you will effectively be overpaying by *more* than £500 each month.

You aren't losing out on anything by doing it one way or the other - either way will have the same end result, if the amount you pay is the same.

IMF2000

blueberrypie wrote: »

What is your goal? Are you wanting to have your mortgage paid off sooner, or are you wanting to reduce the required monthly payment?

I would like to reduce the amount of interest I pay (saving money) and as a side effect will end up paying my mortgage off earlier (ultimately).

If you want your mortgage paid off sooner, keep paying the overpayment but don't phone them up and ask them to apply this as a capital payment. What will happen is that the interest will be reduced from the following month, but as you are still paying the same monthly payment (apart from the overdraft). You will thus be paying more and more off the capital every month.

The situation at the moment is: example figures: original starting direct debit amount was 550. Due to capital repayments, they now only require 500 to be paid each month but are still taking 550 via direct debit. Then I am topping that up by another 500.

In effect I am overpaying more and more each month which I think is the same as what you describe above, if I phone them up or not?

The required monthly payment will probably be re-calculated once a year or so, but in the meantime, you will effectively be overpaying by *more* than £500 each month.

You aren't losing out on anything by doing it one way or the other - either way will have the same end result, if the amount you pay is the same.

This was my original understanding also but if this was really true, why have they been able to credit £36 back to my account by applying it as a capital repayment *now*?

Is this because they are recalculating the interest due *now* rater than at the end of the year where they would credit the interest saved anyway? Effectively I won't loose out but they get to use my money in the short term rather than having it applied as a reduction in capital annually?

I am probably reading more into the situation than is really happening due to lack of understanding. Thanks for your help.

getmore4less

Ok this seems to be the situation.

Interets is calculated based on the end of month ballance.

So make the overpayments just before the end of the month if under £500 (and maybe £500). this should result in the interest savings.

Interest is recalculated if payment is over £500 so any time will do if no ERC try £501.

Ask why they don't do daily interest.

As for the £36 credit how long has this been going on

@5% £500 costs around £2pm that would be 5-6 months.

IMF2000

getmore4less wrote: »

Ok this seems to be the situation.

Interets is calculated based on the end of month ballance.

So make the overpayments just before the end of the month if under £500 (and maybe £500). this should result in the interest savings.

Interest is recalculated if payment is over £500 so any time will do if no ERC try £501.

In theory I am over £500 now as £500 + the additional on the direct debit.

Ask why they don't do daily interest.

Not sure how far I'll get with that one. :rotfl:

As for the £36 credit how long has this been going on

@5% £500 costs around £2pm that would be 5-6 months.

Interest rate is 2.69% at present. It was £2500 building up from September.

IMF2000

One thing that has crossed my mind:

If capital repayments are reducing the required amount to be paid each month, then if interest rates rise before the end of the year, this will mean that the difference can eat into the buffer now instead of my larger overpayment..

blueberrypie

IMF2000 wrote: »

One thing that has crossed my mind:

If capital repayments are reducing the required amount to be paid each month, then if interest rates rise before the end of the year, this will mean that the difference can eat into the buffer now instead of my larger overpayment..

If you're overpaying, you're reducing your balance - it doesn't matter if it's a "capital repayment" or not. There isn't a capital balance and an interest balance - there's a capital balance, and interest added to it each month. If the capital balance is lower (regardless of how it got that way), the monthly interest charged is lower.

IMF2000

blueberrypie wrote: »

If you're overpaying, you're reducing your balance - it doesn't matter if it's a "capital repayment" or not. There isn't a capital balance and an interest balance - there's a capital balance, and interest added to it each month. If the capital balance is lower (regardless of how it got that way), the monthly interest charged is lower.

Yes I realise that. I am eluding to the fact that the amount I am required to pay each month is reducing, so I am overpaying by an ever increasing amount. As rates rise, the amount I am required to pay each month will rise, but perhaps not beyond the initial figure.

To put it another way, if I continued to overpay each month, but they did not reduce the amount I am required to pay, month on month, as rates rise, this would eat into the amount I overpay on top of the original figure.
EG: original DD amount = 550. Overpay 500 (total 1050). Down the line DD rises to 650 due to interest rate rise, I reduce the amount I overpay to 400 to keep my total expenditure each month at (1050).

blueberrypie

IMF2000 wrote: »

Yes I realise that. I am eluding to the fact that the amount I am required to pay each month is reducing, so I am overpaying by an ever increasing amount. As rates rise, the amount I am required to pay each month will rise, but perhaps not beyond the initial figure.

To put it another way, if I continued to overpay each month, but they did not reduce the amount I am required to pay, month on month, as rates rise, this would eat into the amount I overpay on top of the original figure.
EG: original DD amount = 550. Overpay 500 (total 1050). Down the line DD rises to 650 due to interest rate rise, I reduce the amount I overpay to 400 to keep my total expenditure each month at (1050).

If you are paying £1050 each month, it really doesn't matter how much of that is your required payment and how much is overpayment - it all goes towards your mortgage in the same way in the end. If you recalculate your required payment every month, then yes, the required bit of the payment is less and the overpayment is more. If you don't, you're still being charged less interest (because you owe a bit less) and so at the end of the year (or whenever you choose to calculate it), you will still owe exactly the same as if it had been recalculated every month.

What I'm saying is that it makes no difference to how much you will pay in total whether you make the extra payments as "capital repayments" or just plain old "overpayments". In the end, it works out the same: you will owe the same amount, and therefore you'll pay less in interest. The only difference it makes is to when they recalculate the required bit of your payment. There is no point in you worrying about which form of overpayment is more beneficial, because both will have exactly the same effect on your mortgage.

IMF2000

blueberrypie wrote: »

What I'm saying is that it makes no difference to how much you will pay in total whether you make the extra payments as "capital repayments" or just plain old "overpayments". In the end, it works out the same: you will owe the same amount, and therefore you'll pay less in interest. The only difference it makes is to when they recalculate the required bit of your payment. There is no point in you worrying about which form of overpayment is more beneficial, because both will have exactly the same effect on your mortgage.

I accept what you are saying and I understand. Can you recommend any spreadsheets where I can input both scenarios and see the outcome for myself? I think this will help me to fully appreciate why this is the case.
I will also get to grips with the mortgages exposed guide book.

Cheers.