Mathematician required

mary

We have had to remortgage and to put it in round figures, we are borrowing £60,000 at 4.98% Fixed rate for 10 years. Just got it fixed this week. We are allowed to repay up to 5% without incurring any penalties

Can someone do a short table for me to show how the sums work out over the 10 years if we regularly make a 5% repayment, i.e.
Year 1 Initial balance 60,000, 5% £3,000 allowed = monthely repayment of ?
Year 2 Outstanding balance ? 5%
Year 3 etc

I've looked on https://www.whatsthecost and this gives you the straightforward borrowing of 60,000 for 10 years and what the monthly repayments will be, but I've got confused in trying to work out what it would be if we are able to overpay the maximum each year.

Hopefully someone can help.

Thanks

david78

Mary,

I can do this for you now using my spreadsheet. (and can show total paid, interest saved etc) But need to know.

(a) is it a repayment mortgage.
(b) what term is the mortgage for.

In the first year, the monthly payment will be £635.81 (£7629.68 in the year), so this is more than the 5% you are prepared to pay. (or is the 5% the extra overpayment you are allowed?)

David.

mary

Thanks David,

It's a) Repayment mortgage
b) Fixed 10 years
c) It's an overpayment maximum of 5% (NB last sentence of last paragraph)

Quote from Woolwich/barclays site:
10-year fixed rate
4.98% until 31 January 2017 thereafter reverting to Barclays Bank Base Rate, which is variable, currently 4.75% + 0.95% = 5.70% for the remaining term of the mortgage. The overall cost for comparison is 5.4% APR. Application fee: £595 Borrow up to 80% of the value of your home.

Ten-year fixed rate: Early repayment charge: 6% of the balance repaid will apply if the mortgage is repaid in whole, part or transferred to another scheme until 31 January 2017. However, you can overpay up to 5% per year during the fixed rate period without incurring an early repayment charge.

Robert_Sterling

When you say "We are allowed to repay up to 5%" what does it mean.
I can see that 5% of £60000 is £3000.
Does that mean that you can pay £3000 in a lump sum once during the first year.
Does it mean you can overpay £250 per month during the first year.
In subsequent years is it 5% of the original balance of £60,000
Is it 5% of the balance outstanding at the begining of the second year.

david78

Here are the results.

10 years mortgage fixed at 4.98% overpay by 5% per year of outstanding balance at start of the year.

I have assumed overpayments are made monthly (i.e. 5%/12) and that the payment demanded by the lender is set annually. I have also assumed mortgage payments are made on 1st of the month (and that all months are the same number of days!)

yr = year number
mp = monthly payment wanted by lender
op = your overpayment
be = balance at end of year

Here is the table. Hope it formats okay.

year mp op be
1 £635.81 £250.00 £52,136.33
2 £599.97 £217.23 £44,717.81
3 £565.70 £186.32 £37,724.86
4 £532.85 £157.19 £31,139.85
5 £501.22 £129.75 £24,947.53
6 £470.56 £103.75 £19,135.72
7 £440.51 £ 79.73 £13,696.85
8 £410.38 £ 57.07 £ 8,251.65
9 £378.61 £ 35.97 £ 3,619.81
10 £339.00 £16.50 £ -220.71 (you paid £220 too much)

The calculation shows the mortgage is paid off in 9 years and 11 months.

Interest saved:
Without overpayments the total interest paid would be £16,296.80. With the overpayments it is £13,078.90. The saving is much less than might be expected. This is because the lender reduces the amount it wants from you each year, and the amount of your overpayment decreases too.

david78

Robert_Sterling wrote:

When you say "We are allowed to repay up to 5%" what does it mean.
I can see that 5% of £60000 is £3000.
Does that mean that you can pay £3000 in a lump sum once during the first year.
Does it mean you can overpay £250 per month during the first year.
In subsequent years is it 5% of the original balance of £60,000
Is it 5% of the balance outstanding at the begining of the second year.

Hi Robert,

Normally it means you can overpay by 5% of the balance on your mortgage statement, which goes down each year. You can pay one lump sum, several lump sums, or spread it out monthly. No doubt mary will say if its different for this product.

I have assumed in may's case, she wants to make constant monthly payments each year, comprised of the minimum payment the lender demands, plus the overpayment. Her payments will go down over the years as a result of the overpayments, even though she is on a fixed rate.

mrcow

Hi David, would it not be better for the OP to use the overpayment to reduce the term though? Rather than sticking to the original ten year plan? Or is this not possible?

mary

Robert,

What I have quoted is what is on their website, but my understanding with the person I was doing the application with was that it will be a shrinking balance. In subsequent years the overpayment would be 5% of the balance outstanding at the beginning of the second year. You can make a lump sum payment for sure, but I guess you can also make it a monthly overpayment if you want. In our case it's more likely to be a lump sum payment once during the first year.

mary

David,

That's brilliant. That's just what I wanted to see, but didn't know how to arrive at the figures. Many many thanks.

mary

mrcow wrote:

Hi David, would it not be better for the OP to use the overpayment to reduce the term though? Rather than sticking to the original ten year plan? Or is this not possible?

Thanks for the suggestion. However a fixed 10 year term, is just that, fixed for 10 years. You can make early repayments beyond the permitted 5%, but there are hefty penalties. We are hoping that sales of some goods overseas will be coming back to us but the timing is random, so it would be easier to make one lump sum payment as and when we receive any extra cash.

jamesd

A 6% penalty is less than the cost of not making the early repayment, since you pay 4.98% in the first year and again in each subsequent year, plus compounding on the interest paid. You're ahead within about 16 months even after paying the penalty.

However, at just 4.98% on the borrowing, you can probably make more money on savings and investments than you save in interest. For example, the Ruffler Bank cash ISA pays 5.75% now, likely 6% within a few days. If you can use this it really doesn't pay to overpay by more than the 5% allowance.