Lower mortgage or lump sum overpayments

Del_Boy_Gupta

Can those of you in the know confirm whether the following is true or not

I have just finsihed a two year tracker with Abbey. I thought I would try to be pay the mortgage off quicker rather than slower and so I took it over 20 years rather than 25 years with the option to make repayments of up to 10% of the mortgage each year.

Having just received my statement for the last year, I was confused by one element of it.

it appears that my lump sum overpayment reduced the capital by the full amount and did not contribute to paying any interest only.

I presume that as this is the case, given that I was planning to remortgage elsewhere after the two years I would have been better off paying the mortgage over a longer time frame to make mothly repayments smaller, as only a small fraction at outset of mothly payments pays off the capital. Then I could have made lump sum overpayments to reduce fully the capital.

If I pay regular overpayments say £50 per moth on top of the mothly repayment does this also utomatically reduce the capital by £50 or with regular overpayments does it only reduce part of the captial and pay off the interest as well?

Joe_Bloggs

Reducing the capital borrowed is a good thing to do if you cannot get a better net return on that money. Sometimes your lender only recalculates how much your total repayments should be after an interest rate change. There has not been a rate change in 8 months. My remortgage repayments have remained the same despite many overpayments. I just pay a bit less interest each month and a bit more capital each month.

A few mortgage lenders only do calculations once a year so monthly overpayments lose monthly/daily interest that they could have made in your deposit account.They don't pay off any capital until the lender can be bothered to consider this amount, once a year. It is then best to put overpayments into a deposit account and pay from this account once a year just before they condider yearly overpayments, in this example.
J_B.
There are other permutations I won't go into at this time.

mrcow

The interest part of your mortgage is calculated within your normal payment schedule. Any overpayments (lump sum or regular) will reduce the capital over and above this normal schedule.

The interest is only worked out (either daily or annually) on any outstanding balance, so by making overpayments of either sort, you'll be saving yourself money in terms of interest. The less you owe, the less interest you'll pay,

Taking the mortgage over a longer period of time IMO isn't really worth it if you can afford the repayments of the 20 year period. The higher monthly payments that you are paying are contributing to paying off the capital earlier and have nothing to do with any interest payments (apart from they will reduce the amount of interest you will owe).

You're probably saving yourself £000s in interest by this five year reduction and the overpayments.