Overpayments - How does it work?

kzfocus

Hi everyone!

I was reading up on mortgage overpayments recently. I understand any overpayments come off the capital rather than the interest. If a lender was restrictions i.e. maximum 10% of the capital per year. How does this work if paying in the occasional lump sum?

For example, on a £100,000 mortgage fixed for two years. Is the max £10,000 per year or does the allowable amount reduce depending on when the overpayment made?

Also if interest is calculated daily, is there a best time for the overpayment to be made?

beecher2

I think it may vary from lender to lender so best checking with them. With Halifax a 10% capital repayment was allowed in any rolling 12 month period, and was calculated from the amount outstanding. Best time to overpay is as soon as you have the money available!

If you find that you want to overpay more than you're allowed to, look at the option of decreasing the mortgage term.

handytips

kzfocus wrote: »

Hi everyone!

I was reading up on mortgage overpayments recently. I understand any overpayments come off the capital rather than the interest. If a lender was restrictions i.e. maximum 10% of the capital per year. How does this work if paying in the occasional lump sum?

For example, on a £100,000 mortgage fixed for two years. Is the max £10,000 per year or does the allowable amount reduce depending on when the overpayment made?

Also if interest is calculated daily, is there a best time for the overpayment to be made?

As the mortgage is on a daily interest basis the overpayment takes affect from midnight on the day that you make the overpayment. With a lump sum payment this is also the case. If you make an overpayment today the next one you will be able to make is in a years time. The capital overpayment will reduce the capital sum owed without the need for an interest factor. However if you are looking to make capital overpayments on a regular basis then i would suggest the next time your mortgage is up for review, would be to consider a fully flexible mortgage that allows unlimited overpayments without penalty or a mortgage that has an offset facility. To get the best deals available on offset mortgages and how they work would be to seek the advice of a Whole of Market mortgage advisor who will be able to point you in the right direction and advise you the best product for you

kzfocus

Thank for the replies.

Handytips, does that mean I can only make one lump sum overpayment in a 12 month period?

handytips

The amount that you can overpay will be in your original mortgage offer, usually 10% of the capital outstanding if you are within a deal period, for eg fixed term etc. If you are on the lenders reversionary rate, then you can overpay by as much as you want. However like i have suggested earlier should you be on the reversionary rate you may be better off remortgaging on a lower term.
A mortgage term can be determined by the amount you want to pay per month, this may well be a more cost effective way of managing the mortgage debt now and in the future.
If you post the capital outstanding the remaining term and how much you want to pay per month i will work it out for you.
overpayments can be worked out as following, for eg £100k mortgage £10k in first year, check what is outstanding 12 months later and 10% of that. or divide the amount by 12 and that will also give you your limitations on what you can overpay on a monthly basis. I would also suggest that a good broker in your locality will be able to tailor a suitable product for your particular needs and preferences. Good Luck