Overpayment and reducing term?

golly99

Hi

Approx 5 yrs ago took out mortgage with Nationwide, £130k with £13k deposit over a standard 25 yrs. Mortgage currently stands at approx 99k now with overpayment fund of approx £5kish. We have just signed up to carry on the mortgage with 20 yrs to go, when does the term reduce as a result of overpayments or does it not work like that?

Thanks!
golly

KTF

I queried this with nationwide and the term is only shown to be reduced if you overpay by £500 or more a month. Overpaying by any less goes into the fund as you say but it is taken off the total balance.

When you switched deals you can ask for whatever term you like so could have pulled it in then.

MancBrel

Be careful when overpaying less than £500 with Nationwide. The overpayment money is not automatically knocked off the loan or term. They wait until the next rate rise or fall, and adjust your new payments to take into account the overpayment. So without noticing, you are making your monthly payments less, and not shortening the term.

I overpay about £120 a month, and do about 5 bigger overpayments (between £500 anf £2000) a year. I didn't realise what they were doing with my regular overpayments, until I read it on here. So I checked my statements to find that although I'd had 2 rate rises over the year, my monthly payments had decreased over time.

Go into your branch and tell them to make sure that any overpayment is taken off the term, and not adjusted on the monthly payments.

golly99

MancBrel wrote: »

Be careful when overpaying less than £500 with Nationwide. The overpayment money is not automatically knocked off the loan or term. They wait until the next rate rise or fall, and adjust your new payments to take into account the overpayment. So without noticing, you are making your monthly payments less, and not shortening the term.

I overpay about £120 a month, and do about 5 bigger overpayments (between £500 anf £2000) a year. I didn't realise what they were doing with my regular overpayments, until I read it on here. So I checked my statements to find that although I'd had 2 rate rises over the year, my monthly payments had decreased over time.

Go into your branch and tell them to make sure that any overpayment is taken off the term, and not adjusted on the monthly payments.

Have been on a fix rate for the last few years, so I guess the only time this will happen is when we are renewing (which we've just done). Probably unlikely at the moment will be overpaying by £500 a month, but maybe an odd hundred or so every month. Would be nice to see that term come down even if it's only by months rather than years!

KTF

Mine is also a Nationwide fixed rate. I remortgaged with 23 years remaining on the original term but with the overpayment each month the amount I am paying is equal to a 12/13 year term (its at a point in between).

I chose this option rather than pulling in the term initially so I could cancel the overpayment if I wanted rather than get stuck with a large payment each month.

When it comes to renewal time I will crunch the numbers again and see how far I can pull the term in as a result of the overpayments.

It is a shame that Nationwide dont recognise the effect of any overpayment though. I have no idea why they have set £500 as the trigger and I gave up trying to get an explanation out of them.

Bargain_Rzl

Why does it matter?

If you overpay anything at all, the overpayment is coming off the capital, therefore IF you pay the same amount each month regardless of the split between regular payment and overpayment, the term will automatically end up shorter as you'll eventually run out of capital debt for them to charge you interest on.

To my knowledge, Nationwide's fixed rates allow an overpayment of up to £500 per month. So if your regular monthly mortgage payment is £750, for example, and you have an additional £250 available to go towards it each month, then you pay them £1000 per month. Your term remains the same but let's say for the sake of demonstration that eventually your monthly payment goes down to £700. If you continue to pay £1000 a month - so the split is now £700 basic/£300 overpayment - you're in exactly the same position, aren't you?

Surely the only situation where it becomes a problem to reduce monthly basic payments instead of the term is if you ever reach a situation where - based on the above example - you're still on a fixed rate, and your monthly basic payment has fallen to £499 a month which means that by continuing to pay £1000 a month, £501 of that is now an overpayment, which would exceed the £500 limit and you'd be penalised.

Am I missing something? (Please do tell me, as I'm on an Nationwide fixed rate myself.)

GreenNinja

Hi Everybody,

Have been reading the site for a couple of weeks now and am finding it totally inspirational! Already tried out some of the recipes and money saving tips from the old style board, but now have plucked up the courage to register as I have a question to ask ref paying off the mortgage early.

Have an interest only mortgage with the Abbey which has 13 years left to run and rang them yesterday to ask about paying off early as a lump sum per year, how much etc etc. I asked the girl on the phone if the term could then be reduced once I had paid off the allowed amount in the year and she said well it wouldn't benefit you at all being that its an interest only mortgage.

I am confused now! Is she right?

Thanks

MancBrel

Well, for me it matters. I don't overpay on my mortgage to get the monthly payments down, I do it to pay off my mortgage as quickly as possible. If they adjust my monthly payments down, as a result of my continual overpayments - this negates the whole point.

Bargain_Rzl

But it wouldn't matter, if your total monthly payment towards your mortgage (standard + overpayments) continues at exactly the same amount. For example, even if your mortgage term officially has 12 years to run, if you've been overpaying thousands every year and you currently have only £1k left on the balance, you'll run out of capital to repay in a month or two's time! The debt will have gone, and therefore you'll still be free of your mortgage! You're not going to continue to spending the next 12 years making monthly payments of zero

As I said before, this depends on ensuring that the balance between standard monthly payment & overpayment doesn't exceed the limits set in your terms and conditions... but otherwise, surely it works in just the same way as officially decreasing the term would

I'm still wondering whether I've missed something obvious...

Bargain_Rzl

GreenNinja wrote: »

Hi Everybody,

Have been reading the site for a couple of weeks now and am finding it totally inspirational! Already tried out some of the recipes and money saving tips from the old style board, but now have plucked up the courage to register as I have a question to ask ref paying off the mortgage early.

Have an interest only mortgage with the Abbey which has 13 years left to run and rang them yesterday to ask about paying off early as a lump sum per year, how much etc etc. I asked the girl on the phone if the term could then be reduced once I had paid off the allowed amount in the year and she said well it wouldn't benefit you at all being that its an interest only mortgage.

I am confused now! Is she right?

Thanks

GreenNinja, I just realised nobody had answered your question. As far as I'm aware, she's wrong. If you made a repayment off the capital it would reduce the amount of interest that you are incurring.

I don't know much about IO mortgages and how restrictive they are about making capital repayments, so perhaps somebody with a bit more know-how could add to this.

InMyDreams

GreenNinja wrote: »

Hi Everybody,

Have been reading the site for a couple of weeks now and am finding it totally inspirational! Already tried out some of the recipes and money saving tips from the old style board, but now have plucked up the courage to register as I have a question to ask ref paying off the mortgage early.

Have an interest only mortgage with the Abbey which has 13 years left to run and rang them yesterday to ask about paying off early as a lump sum per year, how much etc etc. I asked the girl on the phone if the term could then be reduced once I had paid off the allowed amount in the year and she said well it wouldn't benefit you at all being that its an interest only mortgage.

I am confused now! Is she right?

Thanks

Yes, she is right. I think Bargain Rzl has misunderstood your question. He is right that "if you made a repayment off the capital it would reduce the amount of interest that you are incurring" so your regular payment will go down regardless of your term because your regular payment is made up of interest only. You are never paying off your capital which will all be due at the end of your term. For an interest only mortgage, the concept of "term" is nothing more than the date at which you have to pay back the whole lot. Reducing the term is of no benefit to you at all (because it won't automatically adjust the payments like it would on a repayment mortgage). Reducing the outstanding balance however is.

If you reduce the term, and your savings are all tied up and not matured, what are you going to pay your loan back with? You'd have to remortgage again for the time left anyway. Chipping away at the capital however is still just as worthwhile as if you were on a repayment plan. If you continue to keep your payments the same as they were before the initial overpayment, rather than just pay the new lower figure, the difference will effectively be another overpayment which will again bring down the interest owed even further and hence the 'regular payment' will continue to reduce. Keep this up and more and more of your payment will become money off the capital. Effectively this is exactly what happens with a repayment mortgage; the further into the term, the less your payment is made up of interest and the more its made up of capital. But as you are on interest only, this won’t happen automatically, you’ll have to keep manually topping up your payment.

So basically, reducing the term on an interest only mortgage is just academic. The only important thing is that when that term is up, you must have the funds available to pay off whatever balance is remaining (which will be less than the original if you've been chipping away). Of course early redemption charge permitting, there's no reason you can't pay the lot off earlier than the agreed term anyway, so by leaving the term long, you're just giving yourself more time and flexibility to save up to pay it off. However you play it, the more you owe at any time, the more interest you will be charged.