Overpayment confusion (newbie!)

Bezmond

Thanks guys you have been a great help. Going to start paying £100 a month over to start with from next week.

Feel a lot more clear about the whole thing now!!:T

david78

In your case, with the mortgage you have, another option is to ask them to change your mortgage term (knock 5 years off or whatever you are comfortable with). Pay the £10 fee once then make normal payments until your mortgage ends (or you remortgage). The new mortgage payments will be larger than the ones you currently pay. You can use the overpayment calculators to calculate how much extra it costs each month to reduce your mortgage term by a number of years (or just run a normal mortgage calculator on the web twice with different terms).

You might save more interest this way (as the mortgage term is shorter).

david78

catowen wrote: »

Ive been overpaying on my mortgage for a year now, but when i had my last mortgage statement (last month) it showed that i still had 26 years, 8 months left and my monthly repayments were the same, although by one of the mortgage calculator on here, it was showing that i had knocked just over 3 years off the term - so they dont have to change anything if they dont want to!!!

You are right. They usually adjust the payments so that you pay a bit less rather than reduce the term (they even try to con you into reducing the monthly amount by charging for reducing the term). You pay more interest this way and they make more money. Don't let them get away with it. You will save much more over the life of your mortgage if you can get them to reduce the term.

jamesd

david78 wrote: »

You will save much more over the life of your mortgage if you can get them to reduce the term.

Take two people, each taking out a new 100,000 mortgage for 25 years.

For the whole duration of the mortgage person A pays 900 a month and has the term reduce each time, keeping the minimum monthly payment the same each time.

For the whole duration of the mortgage person B pays 900 a month and has the minimum required monthly payment reduced each time.

Please tell me which mortgage will have a zero balance faster and why you believe that is so.

Dithering_Dad

oo, oo. I know this one!

It's like the question, which is heavier a 1 ton bag of lead or a 1 ton bag of feathers!!

erm... feathers!!

I love riddles!

david78

jamesd wrote: »

Take two people, each taking out a new 100,000 mortgage for 25 years.

For the whole duration of the mortgage person A pays 900 a month and has the term reduce each time, keeping the minimum monthly payment the same each time.

For the whole duration of the mortgage person B pays 900 a month and has the minimum required monthly payment reduced each time.

Please tell me which mortgage will have a zero balance faster and why you believe that is so.

No difference, except with the "reduced minimum payments" you usually have to increase the overpayments each year (and stay within the 10% limit). This is because the lender will adjust the minimum payment downwards to hit the same end date. With a "reduced term" plan you don't have to make any adjustments.

jamesd

There's also no difference in what amount 10% of the remaining balance is in each case and that seems to be the usual ten percent limit. Staying precisely within the 10% limit generally doesn't matter that much, since a penalty of say 3% at a mortgage interest rate of 5% is recovered less than a year after overpaying beyond the ten percent. Does reduce the reward for overpaying a little, though.

Agreed about making adjustments. You can do that at the start of the year and have the adjustments automatically average out during the year if the payents are changed monthly.

Bezmond

Think Im going to pay it off the montly repayments then and just adjust the amount upwards if/when they lower my monthly repayments.
Prefer this as is more flexible than reducing the term in case of reduce in income.
Thanks again for all the help.

ohmsoft

Read all the above and all valid and good ideas....

Another sollution if bank will alow is to opt for the monthly payment reduction and chage your method of payment from direct debit to standing order (fixed at the amount you want to repay) - you will need to ensure that you don't go over the 10% mark as your balance decreases but it will save you having to up your overpayment every month