How does mortgage overpayment affect monthly payments?

steve1401

Hi,

New here, so hello!

I have 17 years left on my mortgage, and am in a fixed rate @4.68 till March 2015 (and so lets assume this rate - who knows what 2015 will bring???). I'm allowed to overpay by 10% per year on the original loan amount and interest is calculated daily. So:

I have worked out that I can afford to overpay every month, with a view to bringing the term down (from 17 years to 10 if finances stay willing)

By overpaying the debt (not the interest) does this mean that my monthly amount will reduce every month AND my term reduce, or does this mean that I keep paying the same amount to reduce the term. If the former, is there a calculator which will show my estimated monthly payments over the remaining term?

Does this make sense, and can anybody help??? :-)

Thanks
Steve

andrea_louise

Hi Steve,

you will have to check your t and c's of your mortgage. Mine is with Nationwide and I could overpay, but any overpayment of more than £500 would incur an early repayment charge up until december 12. Since then, I am able to overpay by any amount per month, and choose whether it alters my payments (don't know why anyone would choose this option) or the term!

steve1401

Thanks for the reply Andrea.

I have actually been able to contact my Mortgage company today - Skipton. It turns out (for me) that:

• I can overpay up to 10% per year of the original loan amount without incurring a cost.
• By default, the overpayment will keep the term the same (17 years) but reduce the monthly outgoing month on month as the interest is calculated daily
• However, I can keep the payments the same, thus reducing the term of the mortgage, if I inform them this is what I want to do - it is, and makes my term ~10 years should interest rates remain the same and I can continue to afford the overpayments!

So, I think I have everything sorted now. Hope this information is useful to anyone else confused by it all, like me :-)

andrea_louise

That's great Steve,

Welcome to the mortgage free wannabe forum!

ViolaLass

steve1401 wrote: »

By overpaying the debt (not the interest)

This is not intended as a telling off or anything critical but you should be aware that the phrase above doesn't mean anything. If you're paying more than the interest, then you are by definition paying back capital.

hamster2013

ViolaLass wrote: »

This is not intended as a telling off or anything critical but you should be aware that the phrase above doesn't mean anything. If you're paying more than the interest, then you are by definition paying back capital.

would depend if you have a repayment mortgage vs interest only mortgage
by default, on an interest only mortgage, all over-payments will only be going on the mortgage interest.
infact you could apply that rule on repayment mortgage as well (not sure why anyone would do that though?!!)

SillySod

hamster2013 wrote: »

would depend if you have a repayment mortgage vs interest only mortgage
by default, on an interest only mortgage, all over-payments will only be going on the mortgage interest.
infact you could apply that rule on repayment mortgage as well (not sure why anyone would do that though?!!)

I think you are wrong. Any overpayment will, regardless of the type of mortgage, go towards paying down the debt. The interest is already covered in the monthly payment.

NatWest were a bit tricky with me. The contract had no mention of adjusting the monthly payment, but they considered that if I overpaid the permitted 10% then the monthly payments would have to be adjusted otherwise each further monthly payment would constitute an overpayment above the permitted 10%. I can kind of see their logic but there was no basis for it in the contract. In the end it was resolved by my applying for the mortgage term to be reduced (to bring the monthly payment back to the original level), and them waiving the corresponding £30 fee.

In fact, if you are limited by the overpayment limit, then reducing the term can be a cheap way to increase the amount you can pay (at the cost of flexibility).

steve1401

I get the interest/repayment mortgage thing, I was just wanting clarification on should my overpayments reduce the monthly outgoing and/or the term.

Turns out with Skipton, by default they reduce the outgoing amount every month as the interest-able amount reduces. However, if you get them to set it up, they will keep the outgoings the same, thus reduce the term.

There is a link which cast some confusion and was in part the reason for my original post on the Guardian website, but as a new user I cannot paste it into thei reply - search "if i overpay a mortgage does this reduce the monthly amount" in Google and its half way down...

Thanks for the responses
Steve

ViolaLass

hamster2013 wrote: »

would depend if you have a repayment mortgage vs interest only mortgage
by default, on an interest only mortgage, all over-payments will only be going on the mortgage interest.
infact you could apply that rule on repayment mortgage as well (not sure why anyone would do that though?!!)

nope, if they're overpayments, the interest for that month has already been paid and the overpayment comes off the capital.

hamster2013

ViolaLass wrote: »

nope, if they're overpayments, the interest for that month has already been paid and the overpayment comes off the capital.

I might have been mislead

...if you have an interest-only mortgage all your payments will only be going on your mortgage interest. In this case, if you want to make overpayments, you will need to discuss the best course of action with your lender....

Source: http://www.money.co.uk/article/1004009-should-I-overpay-on-my-mortgage.htm

ViolaLass

hamster2013 wrote: »

I might have been mislead

Source: http://www.money.co.uk/article/1004009-should-I-overpay-on-my-mortgage.htm

What they mean is that your normal monthly payments will be paying off interest and no capital, hence they then say 'if you want to make overpayments...'