As Quick As Possible

Terry111

Hi All,

I am new to the board and would like a bit of advise please.

Im 8 months into a 2.59 above base rate 3 yr tracker. At the time I put down a 25% deposit meaning a mortgage of £93750.

I have been fortunate to inherit some money and have made my maximum 10% overpayment for this year and have around 11k in savings. This is the conumdrum I now face:

Will I be better off upping my payments on the mortgage or continue to make the 10% overpayments until my 3 years runs out.

I assume that increasing my payments would be better but I am new to this game! The thing is, is that if I chose this option the payments are credited both to interest and capital whereas the overpayments will just be treated as capital.

Your help will be very much appreciated. :j

abouttimetoo

Terry111 wrote: »

I assume that increasing my payments would be better but I am new to this game! The thing is, is that if I chose this option the payments are credited both to interest and capital whereas the overpayments will just be treated as capital.

Your help will be very much appreciated. :j

Hi Terry111, welcome to the board. Could you just clarify something first please, I'm not sure I understand what you mean by the above bit in quotes regarding payments credited to both interest and capital and that overpayments will be treated as capital?
Regards

Terry111

No problem - it's hard for me to explain and maybe I don't undertand it fully but here it goes:

Overpayment - If I make an overpayment of say £500 (overpayments limited to 10% a year) the mortgage will decrease £500.

Increase Monthly Payment - If I increase my montly payments by say £100 then my mortgage will not decrease by £100 ie some of the payment will be used to pay interest.

As a consequence I don't know if I will be better off waiting and just paying the 10% every year until my 3 year initial lock in period runs out.

Hope this helps. Being a first time buyer I am not all that clued up on this mortgage lark!

wantabetterlife

I dont think thats how it works terry. All the interest that you incur for your mortgage is always paid in the normal monthly payment. No matter what way you look at it if you are making your normal monthly payments and you make an overpayment of £100 it will come off the capital as you have already paid all the interest in your normal payment already.
Banks to tend to confuse the issue by talking about overpayments and capital repayments but it is all really the same.
Hope that helps

abouttimetoo

Terry111 wrote: »

Overpayment - If I make an overpayment of say £500 (overpayments limited to 10% a year) the mortgage will decrease £500.

Increase Monthly Payment - If I increase my montly payments by say £100 then my mortgage will not decrease by £100 ie some of the payment will be used to pay interest.

Thanks Terry, that's what I thought you were saying. I'm not sure i'll be able to explain this clearly enough via writing but i'll give it a whirl, I'll just make up some figures for the sake of the example, I'm also assuming you are charged daily interest which is pretty much the norm.

Mortgage balance 100, 000
Normal monthly payment £500
Monthly interest payment £50

So, if you make your normal payment £50 goes to the interest and £450 to the capital so if you then make an overpayment on the same day the full amount of the overpayment comes off the capital, and the remaining balance will be £99, 050

If you make the OP the day after your main payment, or some days later you will find that the full £500 will not come off the capital as a few days interest will have accrued in the meantime

If you increase your payment then you 'feel' like not all of it will be used to reduce the capital but it is, it's just that the interest is bound up in it all

What I'm trying to explain (very badly I know) is that it doesn't actually make any difference, you will be paying interest off them both.

When you say 'up' your payment I'm assuming you mean agree a new repayment with your provider, this is normally done by decreasing the term, so the repayments are naturally increased. Reducing the term is something that people often do when they have reached their overpayment maximum but would still like to repay more - it's a nice way round it

If you are intending to decrease the term to bump up your payments you need to consider a couple of things
- should some emergency come up could you afford the higher level of payment
- should some emergency come up could you increase your term again

The other thing to maybe look into is could you get any of your overpayments back if needs be

The bottom line is paying extra and increasing your payments 'officially' both achieve exactly the same thing, the one obstacle here though is you've already reached your 10% maximum

Sorry, this post is getting a bit long but I just wanted to re-iterate that you are interest thing on your overpayments is a red herring

Everyone else, help, can you explain this better than me

dimbo61

You dont give your mortgage balance but if you want to overpay with the £11K you now have in savings all you need to do is reduce the term of the mortgage!
Now say you have a 25 year mortgage term and pay £500 a month if you reduce the term to 12 years your mortgage payment goes upto £900 a month which means that you need to drip feed £400 out of your savings each month.28x400=£11200
At the end of the fix you can extend the term again

wantabetterlife

hi abouttimetoo, i think i know what you are trying to say.
Terri, if for example you make an o/p 10 days after your normal payment, the bank will take ten days of interest out of the overpayment. But the following month you will only pay 20 days interest out of your normal monthly payment as you already paid for 10 during the month when you made your overpayment (assumong a 30 day month). Complicated i know but i hope this is helping, it took me a while to understand it aswell.

Terry111

Thanks all. I think I will reduce my mortgage term. Cheers for the help!!