Confused - overpayments, reducing term - best way?

Marksy

Hi,

After speaking to my provider I've just found out that my overpayments are restricted to a minimun of £500, and if they're capital payments (to reduce the term) then it needs to reduce the term by at least 3 months.. or the monthly payment amounts will go up slightly to accomodate the short fall.

With that in mind, how would I best go about reducing my mortgage ASAP? Here's the facts:

Original Balance: £40,000
Fees added: £4,750
Term: 40 years

Current balance: £32,123
Rate: 5.49%
Fixed until: Sep 2014
Term remaining: 6Y5M

Up until recently, we'd been paying our maximum overpayments (10%/yr) off at the start of our mortgage year, each September. I then found out that I'd be better paying off it monthly (my interest is calculated daily, applied monthly). My idea then was to take our maximum amount that we can pay off penalty free (10% of original loan value - which is £4,475/year) divide that by 12, and then pay that off before our mortgage payments were taken. I just called up to pay off £372.91, but then was told about the £500 / 3 month min adjustment as above.

Sooo, I'm now in a muddle about how I can work this to my advantage. I'm rubbish with numbers, but would paying off £500 each month (as an overpayment) for the next 8 months be the best way to do it? I'd then be short £475 of reaching my £4475 (10%) allowance.. I'd then either need to forget this or pay £500 off and get charged a penalty on that amount. I can't work out if I'd be better off doing it this way, or another way?

They work out the penalty by the following method:

Balance over the allowance (£25 - in this example above)

£25 / <current outstanding mortgage amount> * £1198.65 (early repayment charge) = penalty amount. £0.94 in my case, I think (though, I'm not sure if that's entirely correct).

Any thoughts on this? am I going about it the wrong way?