How to overpay on a fixed rate mortgage

sitesafe

Just posted similar on the mortgages forum.

If you have a fixed rate mortgage but overpay regularly obviously the monthly payments don't go down for the fixed rate term as it's fixed.

However, if you have overpaid will it automatically reduce the years on your mortgage (I put it in the overpayment calculator and it showed that it does BUT the overpayment calculator didn't mention whether it can be used to demonstrate fixed rate deals) or will it contribute to cheaper monthly payments once you've reached the end of the fixed rate? Or both??

Many thanks

littlemrtinkle

Okay if you overpay regardless if you are on a fixed or not your lender will give you a few choices.

1). reduce length of mortgage by keeping your current payments the same.
2) reduce your montly amount you pay thus keeping the length of your mrotgage the same.

you usually have to phone them to stipulate which option you want to choose.

worth noting what you are allowed to overpay without penalty. with nationwide it is £500 per month.

if lender will not let you overpay you can change mortgage term.

sitesafe

littlemrtinkle wrote: »

Okay if you overpay regardless if you are on a fixed or not your lender will give you a few choices.

1). reduce length of mortgage by keeping your current payments the same.
2) reduce your montly amount you pay thus keeping the length of your mrotgage the same.

you usually have to phone them to stipulate which option you want to choose.

worth noting what you are allowed to overpay without penalty. with nationwide it is £500 per month.

if lender will not let you overpay you can change mortgage term.

Thank you for that...

Doshwaster

I'm 9 months in a 2 year fixed rate deal. I recently came into some money so decided to lump as much as possible onto the mortgage.

I rang the mortgage company up and they were very helpful at explaining the options
1) Reduce the monthly payments immediately
2) Keep paying the same for the rest of the term

In the second case the effect is that the term is reduced (as you are paying the same amount a month off a lower amount so it would take you less time to pay it). At the end of the fixed term there would be a recalculation and you could choose to move to a shorter term mortgage. Remember also that interest is calculated daily so putting in a lump sum has a bigger effect than drip feeding it in over time.

That's what I chose to do. My monthly payment is manageable and the thought that I'd just knocked a few years off my mortgage was great. Hopefully I'll be in a position next year, before the fixed term is up, to pay down another lump sum.

dimbo61

Please check and make sure you dont exceed your overpayments allowance if you have one!
Most fixed rate deals allow 10% OP,s each year so read your mortgage paperwork or give the mortgage center a call.

Doshwaster

dimbo61 wrote: »

Please check and make sure you dont exceed your overpayments allowance if you have one!
Most fixed rate deals allow 10% OP,s each year so read your mortgage paperwork or give the mortgage center a call.

Yes, good point. When I called my mortgage company they told me to the exact penny how much I could overpay. So I did.

Also check when the calculation period are - is it calendar year or based upon the anniversary of the mortgage being taken out? Mine is on a calendar year which means that on 2 Jan 2012 I can arrange another lump sum.

mediamgl

Hi. This is my first post on this site, and I'm hoping someone can help me to gain some perspective.

I took out a 30 year mortgage, 3 years ago with Halifax; the initial period is fixed-rate for 5 years (so 2 years remaining @ 5.9%). I have been paying an extra £100 per month from the start of the mortgage by standing order and have made 2 or 3 lump sum over-payments, each equal to 1 month's mortgage payment.

I just didn't get the sense that I was 'moving the needle' with this payment plan, so today I called Halifax to see if my payments were being applied in the most effective manner. It seems that, despite making all of these over-payment arrangements up-front, with someone that sounded pretty credible, all of my over-payments are just sitting in an "advance payment" account. The mortgage person that I spoke to today is going to send me a statement with the actual balance, which should be about £7000.

Essentially, I now have the infamous 2 choices to make:

1. Apply over-payments to reduce the required monthly payment; or,
2. Apply over-payments to reduce the mortgage term.

I was leaning towards option #1 and gradually raising the £100 standing order to off-set any reduction in the required payment (i.e. continue to pay the same amount per month, with a different principal/interest/over-payment allocation). I am not at risk of hitting my annual 10% early repayment charge.

After reading some of the other discussions in the forum, I am now confused -- am I better off with an option #1 strategy to pay off my mortgage early, or should I reduce the overall mortgage term? I can't find any calculators or spreadsheets that model such a comparison.

Any insight from shared experience would be greatly appreciated!

kingster2069

Hi mediamgl, it's really up to you as if you're going to increase your standing order to maintain your original total payments; you are effectively reducing your term without committing to it long term.
A few things I would consider are:
1. How much are you allowed to overpay in a year, this amount normally decreases each year if it's a fixed percentage of your remaining mortgage. If you continue with increasing your standing order at some point you will reach your OP limit.
2. How much emergency cash reserves you have. Reducing your monthly amount would help you survive longer if your income dropped, which could be a consideration.
3. Can you get your OP back or take a payment holiday if needed?
4. If your going to remortgage in a couple of years time, having a lower LTV might enable you to get a better deal next time. I would see what LTV your likely to achieve using http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator, until you get to around 60% LTV every 5% is worth a considerable saving and it might be good to aim to for the next LTV if possible.

Good luck

mediamgl

Thanks for the prompt reply kingster2069.

I hadn't considered the LVT ratio -- that was exactly the kind of consideration / insight that I was hoping to gain through my posting.

Just to complete the picture by addressing the points that you raised:

1. I can pay up to 10% per year of the outstanding balance; I don't foresee this limitation becoming an issue for a few years, and I plan on negotiating a new rate when the current fixed term portion expires (2 years from now).

2. Cash reserves for essentials / emergencies are in order. I have a few more targets to hit, like longer term funding for children's education, and planning for new cars; however, these are somewhat partitioned in my current budgeting method. I feel like I am on-track in these departments, should they retain their relative overall priorities.

3. I cannot get my OP back, but I can use it for a payment holiday for up to 6 months or the value of previous OPs (if less than 6 months payments).

4. I think that you have convinced me to model to reduce LTV as opposed to payment and/or term. Given where I am in the life of the mortgage, this makes a lot of sense and will place me in a good standing when it comes time to renegotiate 2 years from now. Having a target LTV will also challenge me to explore whether I should re-prioritise and change the sequence of achieving some of my other financial targets.

Brilliant suggestion. Thanks!