Overpayment on fixed rate mortgage

funkygirl

Hi

I am one year into a 5 year fixed rate at 4.19%. I have come into an inheritance and would like to put the majority of this money into the mortgage which would approximately half the equity. However, I incur overpayment charges of 5% on what I pay in. I have been advised that I should invest the money and "drip feed" the inheritance at the max monthly overpayment figure until the end of the term. However, I am tempted by the significant decrease in my monthly repayments if I overpay the whole lot now. Also, what about leaving the mortgage (incurring a significant overpayment fee) and getting another package?

Confused! Any ideas?

Thanks

Thrugelmir

Some numbers would help in putting the matter into financial perspective.

What's the ERC on your current mortgage?

funkygirl

Am I allowed to use numbers?!

pogg000

If you type the words it will be fine also!

funkygirl

OK. So house valued at 82000, 56000 left to pay on mortgage. looking to put 25000 into mortgage. current monthly repayments are 330 but told this would be reduced to 187 if I put the 25000 in. so the issue is whether I take advantage of reduced monthly repayments now or use the next 4 years to drip feed 500 a month (well the money will run out before then) and gain interest for the money being invested somewhere else.

leccyblue

funkygirl wrote: »

However, I am tempted by the significant decrease in my monthly repayments if I overpay the whole lot now.

Bear in mind, that if you decide to do it this way - i.e. pay off a lump sum and then decrease your monthly payments - over the term of the mortgage, you are not saving anything. You'll still repay the full amount of interest - AND your ERC on top. Therefore, over the term of the mortgage, overpaying now and reducing your monthly payments will cost you more than if you don't overpay now and leave it running.


However, if you pay a lump sum of the capital and keep your monthly payment the same (and therefore reduce your term) you will save THOUSANDS in interest, which will easily offset any ERC.


So, if the current monthly payments are affordable, I would stick with them. In terms of whether to overpay now or to wait until the end of your fixed rate period; that depends exactly on the figures involved.

funkygirl

Thank you; that is very helpful. Can you tell me what ERC is?!

So, to summarise, with regards to overpaying you are suggesting I do that to decrease the loan amount and stick to present monthly repayments? And the question regarding waiting depends on overpayment penalty which could be avoided by drip feeding until the end of the time? BTW have you seen the figures I have quoted?!

Forgive me if I'm repeating myself...

Yorkie1

What's your present interest rate?

ERC is an early repayment charge; what you've called the overpayment charge. 5% of £25K is £1250.

If you overpay £500 per month (which I assume is the maximum without incurring the charge), it will take 4 years and 2 months
to work your way through the capital - and of course if it's in an interest-bearing account then the deposited sum will go up anyway.

Has your lender actually confirmed for sure that you will be able to drop the monthly repayment during the fixed rate period if you make the large overpayment?

Other things to consider: do you have 3-6 months' of outgoings in a rainy day fund? Do you have adequate pension provision?

dimbo61

I hate giving the lender ONE PENNY more than I need to so!
1 ring your lender at the mortgage centre and ask the question
" Can I reduce the term of my mortgage"
" Do you charge for reducing the term" I paid £50 to reduce the term from 22 years to 10 years
Use" whatsthecost " to work out how much extra it will cost every month to reduce the term.
Say your current term is 21 years and you pay 330 then if you reduce the term to 8 years the new payment is 687 a month.
This way you pay NO ERC but drip feed the money every month and even make a little from the money in savings

funkygirl

answering yorkie 1, my interest rate is 4.19%. they have said my monthly repayments would go down..but I would be paying 1250 for nothing and would be gaining interest on the money in savings