Make overpayments so why does monthly repayment barely change?

poorlittlefish

I have a repayment mortgage (tracker) and I've made overpayments where I've been able to. My mortgage lender automatically recalculates my monthly payments if I make an overpayment that's equivalent to more than three times my normal amount, so I've always overpaid by £1,000 to fall into that bracket.

When I first started to do this, my monthly repayments would go down by around £10. Even though the interest rate is still the same, if I overpay by £1,000 now, I'm only getting a reduction in the monthly repayment of around £3.

I have two questions - firstly, with such a tiny change in my monthly payments, is it really worth me overpaying £1,000 a time or would that £1,000 be better off going into my ISA and earning a little interest?

Secondly, why don't my overpayments reduce my monthly repayments at the same rate? I've heard that with a repayment mortgage you only pay off interest for the first few years, before paying off the capital, so is that the case here? I really don't understand how you can only pay interest to start with, when you continue to pay interest on the capital amount over the full term anyway - I need enlightening about how all this works!

Many thanks.

Gary123456790

Hi,

You pay more interest at the start of the mortgage than at the end because there is more owed at the start.

When you borrow, say 150k at 3% that is around £375 interest charged each month, but when you've paid off 30k and only owe 120k then its down to around £300 a month.

So you pay more and more capital and less interest each month the mortgage goes on.

Can you tell us how much you borrowed, what you owe now and the interest rate?

Simplistically, if you can earn a higher percentage in savings (after tax) then it is better in savings than in the mortgage via overpayments.

Gary.

poorlittlefish

Ah, that makes sense - thanks. I started off borrowing £92,400 over 25 years and, having bought a house cheaper than the one I sold, am down to £57,800, including the various overpayments I've made. As I transferred my existing mortgage to the new house I was able to remain on the same tracker rate, which is 0.28% above base rate, so currently 0.78%. My thinking was that I'd try to pay off as much as I can while the interest rate is low, which would protect me a bit when it inevitably starts rising again.

getmore4less

Stop overpaying and stick the money in savings at more than the mortgage rate.