Mortgage overpayment help!

ricky_v

Hello all,
I'm on a mortgage which calculates interest on an annual basis.

I've made an overpayment of 10% a few weeks before what I think is recalculation day (1 year from the advance). My monthly payments from November have reduced by £28.35 a month (from £261.59 to £233.24). Working out the interest payable on the oustanding capital after overpaying 10% I'm paying £15.33 less interest per month, but also paying £13.02 less off the mortgage per month (in year 1 i was paying off £173.39/month off the loan, now it's only £160.37)?????

I thought the ammount paid off would increase, like it does if I diddn't overpay. I've rang them and they assured me that the overpayment has had an effect on the mortgage and I'm paying less interest due to the overpayment but reducing my capital payment on my normal payment, that just isn't cricket!:(

Is this sort of thing normal when overpaying mortgages? I guess I diddn't miss recalculation day otherwise my mothly payments would be the same this loan year as last loan year (I'm in a 3 year fixed atm)

Cheers

Rich

kingstreet

Most lenders ask you to choose whether you want to keep your monthly payments the same and reduce the term, or vice versa. Yours seems to do both. Odd.

ScotlandM

Kingstreet - I don't think it says anywhere the term had reduced?

Hi Ricky,
As Kingstreet touches on when you overpay the mortgage there are 2 effects and you should have the choice.
Effect 1 - Reduced payment, mortgage term stays the same.
Effect 2 - Payments stay the same but term reduces.

You've had effect 1 applied yes it reduces both interest and capital repayments. If not then you would get to near the end of the deal and have already paid off the full mortgage.

Effect 2 is probably what you wanted. Here the total repayment stays the same but because more capital is paid off the interest part of the repayment is lower. And if total is the same but the interest part is lower the capital part must be higher and with a higher capital repayment you'll pay off the whole mortgage sooner.
Almost everyone on here would advice effect 2 if you can afford it. The banks tend to set effect 1 as default. (for the banks it's better when interest rates go up in the future)

If this makes sense you can ask your bank to change what effect your repayment has, or keep it as is. Most banks can change.
If any questions i'll check this thread for 48 hours

Consumerist

If interest is calculated once annually, you will be better off to reduce the monthly payments - save the difference each month in a savings account and use the proceeds to reduce the mortgage by the next interest-calculation date. If you increase your payments then you will not save any interest because your charge has already been calculated for the next year.

kingstreet

ScotlandM wrote: »

Kingstreet - I don't think it says anywhere the term had reduced?

You're right. Last night, something in the post made me think there was a term reduction implication, but reading it back this morning, I can't see what I thought I saw.

I agree. The OP needs to tell the lender how he wants his overpayment to be treated.

droiderm

This is quite interesting.
I was thinking that we were going to make consistent monthly payments.
Our lender calculates interest daily.
I was going to ask them to reduce the monthly payments but continue saying the same overpayment figure.
I don't see the disadvantage of doing this? With the advantage being lower monthly payments if you ever need it.

ScotlandM

Hi Droiderm, The disadvantage would be having a longer term and with a longer term you pay more interest at the beginning, but assuming you keep to the overpayment then it is the same

100k mortgage, 4% These vairables are fixed

25 year term = 528/month = £158,351 cost
40 year term = 418/month = £200,610 cost

Using the MSE overpayment calculator with 110/month overpayment gives
24 year 11 month = (418+110)/month = £158,141 total cost

Call it the same, the calculators don't use pence for monthly payments which will cause the 1 month and £210 difference.


So, agree sounds a good deal to do it this way. The advantage is you can stop the overpayment (but will cost more in the long run)
Disadvantage would be age. It becomes difficult to have a mortgage after retirement age.

ricky_v

Many thanks for all the replies,

I've made a spreadsheet with remaining capital, interest per month, capital paid per month, etc if I diddn't overpay which goes down nicely to my term of 11 yrs 1 month, if it was at 3.78% for 3 years, and 3.49% var for the rest, next to that I've done exactly the same but included the overpayment. The overpayment has decreased the term by a year according to the spreadsheet.

So it appears that they've done a mixture of effect 1 and 2 as kingstreet said.

If interest is calculated once annually, you will be better off to reduce the monthly payments - save the difference each month in a savings account and use the proceeds to reduce the mortgage by the next interest-calculation date. If you increase your payments then you will not save any interest because your charge has already been calculated for the next year.

That's right, my understanding is that there's no point in overpaying on a montly basis, rather better in 1 lump sum right before recalculation day, which is exactly what I did. Thinking about it if the ammount of capital being paid off increased after overpaying the maxinum, then if I overpayed another 10% of the year 2's starting capital at the end of year 2, then I would be paying more than 10%, like overpaying on an overpayment if that makes any sense. Maybe the reduction of the capital being paid off every month is so that I'm not overpaying every month, as that would be pointless? That's the only reason I can think of???

davenport151

i have followed this thread with interest (!). Our mortgage is also an annual type. This suits us but I hadn't considered the impact when overpaying.
great advice. thankyou.