Nearly got a mortgage, overpayment advice please!

jjjenny

Hello,

I hope I am posting in the write place. I hope to be moving into my (first!) property in Dec 2011 and just wanted some advice on "over payments". The mortgage repayments are pretty comfy, even though its a variable rate and I know it could go up, so I was thinking about adding a few pennies here and there to over pay on the mortgage.

Firstly, I don't know if it's even worth over paying as there is work to be done on the house and didn't know if it is better to invest in the house or split it a bit both ways...

If I over pay (just for arguments sake) a tenner a month, would that ten pounds come directly off the capital or would it be split between the capital and the interest. I didn't know if it was a case of... over pay by a tenner and then you pay less interest on a your overall debt, I didn't know if it would be going just towards the capital.

If someone can explain it a little bit more clearly that would be great. I should note there are no over payment clauses etc.. or anything like that, I've downloaded an excel mortgage calulator that someone posted on here which is excellent (a tenner a month saves £900 in interest) plus mortgage paid off 15 months earlier...

Thanks,

Jenny

xxx

Bargain_Rzl

jjjenny wrote: »

If I over pay (just for arguments sake) a tenner a month, would that ten pounds come directly off the capital or would it be split between the capital and the interest. I didn't know if it was a case of... over pay by a tenner and then you pay less interest on a your overall debt, I didn't know if it would be going just towards the capital.

If you have a repayment mortgage, your regular monthly payment pays off all of the interest you've incurred that month plus an amount of the capital.

So your hypothetical £10 comes straight off the capital, because the interest is already covered by your normal payment.

jjjenny

Thanks Bargain Rzl, I just wanted to check, many thanks!

Jenny

xxx

JimmyTheWig

That's how it should work.
But in some cases the mortgage company will identify it as part of your regular payments and amend your next direct debit by a tenner!
With Santander, for example, you can do an overpayment by bank transfer but you have to contact them first to say that you want it to come off the capital. You then get the choice of wanting the monthly repayments to be reduced or the term of the mortgage to be reduced. From what you are saying you want the term of the mortgage to be reduced.

jjjenny

Hi JimmyTheWig,

To be honest I'm not quite sure what I want, we sign the paperwork for the mortgage next week and I am just looking at the long term options to try and budget for the future. The house is 1970's "retro chic! (or so my husband is trying to persuade me!! LOL!) so it needs a hell of a lot of work anyway. Being new at all this, I am trying to go into it with my eye wide open and tryiny to work out what will work out best for us, hence all my really silly questions scattered over the forum.

Jenny

xxx

JimmyTheWig

In which case, jjjenny, I'm going to suggest something that I wouldn't normally suggest...

Don't overpay your mortgage!


I'll explain...

Interest rates are low at the moment. Assuming that you've got a good deal on your mortgage then you won't be saving _that_ much in interest.
Put the money you could afford to overpay with into a savings account. Then if you need it to do up the house, etc, it's there. Much better than paying it off the mortgage and then needing a bank loan to do work on the house.
If once you've built up a buffer in savings you can still afford to pay money off the mortgage then do just that.

jjjenny

Hi Jimmy,

Thanks for that, we've got 4.99% tracker on £112500 (10% deposit), £603 mortgage per month.. we have a bit of savings to throw at the house to make it less 70's (it's even got a lit up built in drinks cabinet next to the fireplace which just makes me smile!) but I was unsure as to whether to go crazy in B&Q or do it more slowly and split the pot.

Jenny

xxx

pinkteapot

Agree with JimmyTheWig - once you make an overpayment the money becomes equity in your house. If you put it in savings, you can take it out again if you need to. If you use it as an overpayment, you can't get that money back unless you take out a larger mortgage or a loan. I would start overpaying after you have some money in savings which you are comfortable with as an emergency/home improvements pot.

It's a lot easier to pay a chunk off the mortgage with surplus cash that is sitting in savings than it is to get money back out of your mortgage.

Who's your lender? We're with HSBC and overpayments are as simple as can be - just a transfer between accounts on internet banking. They instantly reduce the capital owed (which is displayed daily on internet banking).

jjjenny

Thanks Pinkteapot (cool name by the way and awsome picture!)

We will be with HSBC, (I bank with them currently but think the interface for online banking is pretty pants, I just want a big tin of gloss paint and make it pretty!!) so fingers crossed it will be nice and easy to sort out over payments.

So... plan of action.... do up house, put extra cash in savings pot, then think about over payments?

pinkteapot

I think that sounds like a good plan. You'll be amazed how much you can spend doing up the house. I swear, it's impossible to leave B&Q having spent less than £100 a time. Postponing an overpayment by six months to a year say, with the mortgage interest rate fairly low, won't cost you very much and will give you more flexibility with your money.

We make overpayments with money we are completely happy 'losing' as it were. We saved up a cash pot first and then started overpaying (though are also currently doing up our house!).

We're on a tracker too and it is good to make overpayments while the base rate is so low. But with the state of things at the moment I don't personally think rates are going up anytime soon.

JimmyTheWig

Sounds like a good plan.

The _only_ thing I'm now going to say which slightly contradicts what I've said above is as follows...

Any money that you overpay your mortgage with will save you significant money in the future.
So if you can find you have added enthusiasm to do this then do it. For example if the answer to the question "takeaway tonight or money into savings" is takeaway but the answer to the question "takeaway tonight or overpayment on the mortgage" is overpayment then go ahead and make the overpayment.
Equally, don't spend on doing up the house just because the money is there to be spent. Spend what you both think is reasonable and if you've then got extra to bump up your savings or to pay off the mortgage then that's great.