Mortgage Overpayments

Lyrrad

Hi

Some advise please.

I have just taken out a 2 fixed morgage with Halifax that allows me to make overpayments of up to 10% per year.

I know that I need to make sure that any overpayment is taken off the Capital, and I have set up a template letter to make sure that any cheque sent to Halifax states this clearly. However should my letter state that the interest I am paying each month is adjusted, or as I am prepared to keep this amount constant part of this payment is then used to pay off part of the capital too.
I am a bit confused, as I am making capital repayements to reduce my term not reduce my monthly payments, but I am not too sure if I will be making myself clear to Halifax, and indeed if they will be able to adjust my account properly.

EDIT. I think I need to explain that although I have a 25 year interest only mortgage with Halifax, my plan is to convert it to a 13-15 year repayment in 1 or 2 years time.

ThankYouAndEnjoy!

Hello


When making an overpayment on a repayment mortgage, the overpayment will come off of the capital of the mortgage and reduce the interest charged (daily interest charge) accordingly (as interest will be charged on a lower outstanding amount)

When you write your letter, you will probably want to state whether you wish the term of the mortgage to be reduced with the overpayment, or if you prefer, your regular monthly payment will reduce but the term will remain the same.

InMyDreams

OK, so it's a bit different with IO mortgages. As ThankYouAndEnjoy! said, the overpayment will come off the capital anyway, but because it's IO, all this means is that your monthly payment will go down because the interest has been reduced. With IO you can't adjust your regular payment to whatever you want, because your regular payment is just that: interest only. Hence why it's called an interest only mortgage. You will just have to make another overpayment of the difference if you want to keep paying at the same level. This in turn will come off the capital again and your regular payment will be reduced some more. And so on. If there's a minimum amount you have to pay to make an overpayment, then just stick the money in a savings account until it reaches the necessary amount.

As for the term, there's no reason or benefit to reducing the official term of an IO mortgage becasue all you're paying is the interest. For repayment mortgages, the term effects how much capital you pay off each month, but with IO you're not doing that anyway. The term is just the date by which you have to pay pack, in one lump sum, the whole balance. So bringing down that balance is all that matters.

Ivrytwr3

Your overpayment will either reduce the capital or the monthly amount paid (but keeping your full term).

You are over complicating things; a brief note will suffice.

"This payment is intended to reduce the capital on my mortgage".

InMyDreams

Ivrytwr3 wrote: »

Your overpayment will either reduce the capital or the monthly amount paid (but keeping your full term).

You are over complicating things; a brief note will suffice.

"This payment is intended to reduce the capital on my mortgage".

This is incorrect. An overpayment will always reduce the capital. On a repayment mortgage, this can either have the effect of reducing the monthly payments (because you are paying less interest as your capital is less) or reducing the term (because keeping the payment the same, the extra goes towards your capital so it will be paid off sooner).

The OP has an IO mortgage though, so this is all academic.

David_B_2

Ivrytwr3 wrote: »

Your overpayment will either reduce the capital or the monthly amount paid (but keeping your full term).

You are over complicating things; a brief note will suffice.

"This payment is intended to reduce the capital on my mortgage".

I'd agree with Ivrytwr3, nice and simple. Payment taken off the captial and therefore reducing the daily interest that is charged.

Ivrytwr3

The OP has an IO mortgage though, so this is all academic.

Even though this is an IO mortgage there is still a capital in there. The overpayment facility is used to reduce diectly on the capital.

InMyDreams

David_B wrote: »

I'd agree with Ivrytwr3, nice and simple. Payment taken off the captial and therefore reducing the daily interest that is charged.

But that isn't what Ivrytwr3 said. Reading again, I think it was actually a typo on Ivrytwr3's part, and where he's written 'capital' he meant 'term' because he didn't see the OP's edit that we are talking about an IO mortgage.

The payment will be taken of the capital anyway... you don't need to tell the mortgage people that. And becasue it's IO, there is no debate about term or payment because the payment will inevitably reduce. With IO there is no relationship between the payment and the term like there is with a repayment mortgage.

So David, what you've suggested is what's going to happen anyway, regardless of whether the OP writes a letter or not. There's nothing the OP can do about it.

InMyDreams

Ivrytwr3 wrote: »

Even though this is an IO mortgage there is still a capital in there. The overpayment facility is used to reduce diectly on the capital.

I'm not disputing that. An overpayment always reduces the capital, regardless of whether it's IO or repayment.

Lyrrad

Okay

If an overpayment will always reduce the capital. I am right to say this will happen.

25 years IO = Payment £500 per month

Make an over payment of £1000

Now IO = £470 per month.

HOWEVER IF I KEEP MY PAYMENTS AT £500 PER MONTH, £30 WILL COME OFF CAPITAL AS WELL.

The above is hypothetical, and I understand that as the £30.00 reduces the capital that next month that amount could be £30.05 off the capital the following month.


My point is will this all happen automatically, can it go any other way if not monitored?

I just want the amount I need to move to a capital repayment in 12-24 months time to be the least amount possible

Ivrytwr3

an overpayment can reduce the capital/term or monthly payments you have to specify which you want.