Mortgage Overpayment Question

Snich76

I have a quick question about overpaying part of my mortgage. I wont go into the details, amounts and percentages etc of my particular deal (which is an extremely attractive lifetime tracker) but basically I want to pay off approximately 10% now then set up a regular overpayment.

I have spoken to my bank who say once the overpayment(s) hit the account I can chose whether to either reduce the term of the mortgage and keep the monthly DD payments the same OR have them recalculate the interest immediately after the OP (interest calculated daily) to reduce the amount of monthly repayment but keep the term the same.

Is there a recommended option for someone like me who wants to pay off the mortgage as early as possible? As my intention is to pay off my mortgage early the obvious answer is the former but was wondering if there are any glaring disadvantages to this that I have missed. Would it be financially beneficial to chose one method over the other?

happycamel_2

You'd be better to reduce the term and then keep the payment the same, this will increase your capital repayment without eating in to your OP limit (if you have one). Do check if you do, I'm with Santander and am limited to 10% of the balance on 1st January as an overpayment every year.

kingstreet

Opt to keep the contractual monthly payments the same and have the overpayments reduce the term.

Is your "extremely attractive lifetime tracker" at a higher or lower rate than what you could get on savings, perhaps via an ISA?

If the savings rate is higher, think about saving rather than overpayments. Review if rates change.

Mr_Incredible

I would recomend that you don't change the term of the mortgage. I know this sounds contradictory to your goal of paying off your mortgage early but here's why I recomend it;

By making a lump payment as you are intended and simply paying down the amount outstanding/owed, yet keeping your unexpired mortgage term the same, this will reduce the compulsary monthly payments since there will be the same outstanding term but predicated on a lower total outstanding amount.

You can still make overpayments as and when you wish but in terms of your contractually binding monthly payments, these are reduced and you can breathe a little easier each month and over pay what you want when you want and not have to worry.

droiderm

Completely agree.

cb4fwh

happycamel wrote: »

I'm with Santander and am limited to 10% of the balance on 1st January as an overpayment every year.

As well as the 10% of the balance in January, you can also overpay upto £499 per month on each mortgage product that you currently hold...

Snich76

happycamel wrote: »

You'd be better to reduce the term and then keep the payment the same, this will increase your capital repayment without eating in to your OP limit (if you have one). Do check if you do, I'm with Santander and am limited to 10% of the balance on 1st January as an overpayment every year.

I checked with them at the time and as I'm in a lifetime tracker with no limited time deal, I have no overpayment limit!

kingstreet wrote: »

Opt to keep the contractual monthly payments the same and have the overpayments reduce the term.

Is your "extremely attractive lifetime tracker" at a higher or lower rate than what you could get on savings, perhaps via an ISA?

If the savings rate is higher, think about saving rather than overpayments. Review if rates change.

I am maxed out on my tax free savings and investments (Stocks and share ISA, NS&I saving certificate). The majority of my mortgage is on a tracker @ 0.5% above base :j with another sub-account at 2.5% which is the part I want to overpay as a priority until its paid off.

Mr_Incredible wrote: »

I would recomend that you don't change the term of the mortgage. I know this sounds contradictory to your goal of paying off your mortgage early but here's why I recomend it;

By making a lump payment as you are intended and simply paying down the amount outstanding/owed, yet keeping your unexpired mortgage term the same, this will reduce the compulsary monthly payments since there will be the same outstanding term but predicated on a lower total outstanding amount.

You can still make overpayments as and when you wish but in terms of your contractually binding monthly payments, these are reduced and you can breathe a little easier each month and over pay what you want when you want and not have to worry.

Thats good advice and the kind of thing I was thinking about. Not sure if it works this way or not, but I thought if the amount of repayment goes down each month (with the term staying the same) then when I make the next months overpayment, the amount of loan will have been reduced so therefore I pay less interest the next month (only marginally but it all adds up in the end).

boundah

Although I agree with Mr Incred's point if you really must overpay, I'd first ask the question: why?

I can see the psychological attraction: debt is bad so get rid of it. But after doing the maths myself I decided to put any excess capital and regular income into a savings account, and I'm now making on the deal.

The sums are like this:
Mortgage rate: 0.99% (tracker @ BR+0.49% - I was lucky).
Savings account (Ratesetter): c5.5% gross, 3.3% net (after 40% tax).
So I'm earning a net 2.2% free money.

Even if you're really risk-averse and like giving your money away to traditional bankers, you may end up winning on the deal - even more so if you are a lower-rate taxpayer. If rates rise, you can always change your mind - which most lenders won't let you do once you've paid down the mortgage and done them a big favour.

Snich76

I have considered saving rather than overpaying, hence why I have the max allowable amounts in S&S ISA and NS&I Saving Certificate, anything else is taxable so unless I chose to tie up money for 4-5 years in fixed savings accounts (not advisable) any savings interest would be lower than what I am paying on my mortgage subaccount (2.5%).