Overpayments query

quanto2009

Hi
Looking at doing some overpayment currently on a rate of 2.49% after coming off a 5year fix of 5.63.
Outstanding mortgage £30450 paying £275pm Nationwide 11 years left, have overpaid in the past and have some overpayment reserve.
1.If I pay anything over the monthly figure is this taken off the outstanding amount straight away e.g overpaid £30 but only £28 was taken of the amount owed?
2.Is it best to make larger lump sums e.g £500 there is no no restrictions only that if you want to reduce monthly amount on over payments with £500 plus.
Money is a bit tight and need to make the most of any over payments
Thanks

Thrugelmir

To maximise interest savings. Make an overpayment when ever you are able. As the old Tesco saying goes "Every little bit helps".

May not appear significant now but will pay dividends in the years ahead.

quanto2009

Thanks that's what I intend to do, but do the over payments all go to reducing the outstanding amount or is there a element of interest and repayment.

Thrugelmir

Interest is calculated daily and charged monthly on your mortgage balance. So any overpayments will have the effect of reducing the total interest payable.

The overall effect will be that your mortgage will be repaid some months earlier than the scheduled term end date.

quanto2009

Am I right in thinking once I have paid my monthly mortgage amount of interest and capital all of any overpayment will directly reduce the outstanding balance on the mortgage?
Made a overpayment this month after normal mortgage payment of £30 but the outstanding amount only reduced by £28 is that correct?

brizza

One thing to bear in mind is that if you're paying interest at 2.49% on the mortgage, you'll almost certainly be able to get a better rate saving money in an ISA than paying it off on the mortgage. I'd fill up your ISA allowance for the year first, then start to pay down the mortgage.

(This is from a purely numerical point of view, ignoring the fact you'll be tempted to spend money if it's freely available in an ISA balance).

dimbo61

I can check my mortgage every day ( sad I know) and each day it goes up as the interest us added!
Now at the end of the month you make your normal mortgage payment which for example might be £200 of which £100 is interest and £100 is repayment so if you overpay the total amount comes straight off the balance !!
So you pay £30 but the balance only goes down by £28 because interest is added every day ( Simple really)

OffGridLiving

Some mortgage providers have a minimum overpayment amount, so you might want to check with yours to make sure your overpayments dont just sit in an interest free acount until they build up to the minimum balance. Often the minimum is £500 to £1000. You also need to let your bank know whether you want overpayments to reduce the term or the monthly payments. If you choose to reduce the term then your normal monthly repayments stay the same but your mortgage is paid off quicker. If you choose to reduce your monthly payments, then your mortgage is not paid off quicker but your normal monthly repayments go down. Most people opt to reduce the length of the mortgage to get rid of it quicker.

jrawle

Do I take it from your slightly confusing original post that you are with Nationwide? If you've been with them for over 5 years, you'll be on the old-style Base Mortgage Rate (BMR) (although surely the rate is 2.5% not 2.49?)

In this case, any overpayments are immediately applied to your mortgage account (not held in a separate account until you reach a threshold as someone suggested). As others have explained, interest is calculated daily. As soon as you make an overpayment, it is applied to your balance the same day, but remember that interest is charged each day too so you won't see the balance reduce by exactly the same amount. However, this is only interest that would have been charged anyway, you just wouldn't have seen it unless you check your mortgage balance every day. Overpayments are always advantageous.

If you are indeed on the BMR, you can also borrow back your overpayment reserve whenever you need, a great feature not available to customers for a few years. That makes it in effect a tax-free account paying 2.5%. I don't share the confidence of other posters that you can "almost certainly" get a better rate of interest in an ISA, as it's very hard to find one paying this much these days, certainly without locking your money away for very many years.

To sum up, the advice is to overpay as soon as you can as it'll save more interest. Check if you can get an ISA of 2.5% (or taxable savings of 3.2%) but if you can't, it's best to make overpayments.

getmore4less

quanto2009 wrote: »

Am I right in thinking once I have paid my monthly mortgage amount of interest and capital all of any overpayment will directly reduce the outstanding balance on the mortgage?
Made a overpayment this month after normal mortgage payment of £30 but the outstanding amount only reduced by £28 is that correct?

The reality in practce is that all payments come off the capital

In addition every month some interest gets added to the capital.