Mortgage overpayment clarification please

ian-d

I've been over paying my 'capital repayment' mortgage by £500 each month for many years through Nationwide, and as part of their system, for every £500 overpayment, they reduce the monthly payment paid rather than the overall term.

I've used the moneysavingexpert calculator to work out how much I will save on interest and term if I continue, but the issue I'm finding is that it assumes your monthly contribution remains the same, rather than reducing per month (mine drops about £3 per month as a result).

Does anyone know of a calculator that covers this too, or can anyone confirm how much of a difference this is making compared to the calculator, as I suspect I won't be seeing quite the same benefit.

.

Beckyy

I don't know of one, but you could just ask them not to reduce your monthly repayment providing there's no issues with them doing it?

ian-d

That might be a possibility, but was just interested to find out if anyone had a calculator that could work this out for me, or could give an idea of how much of a difference it makes so I'm not making changes for no good reason.

Stuey1980

I had a similar query myself since my bank ask me each time if I would like to reduce the term or the repayments. I have been reducing the repayments to make things a little more comfortable, however now things seem to be more comfotable I think the advantage would be to reduce the term. Both options will cost less in the long run, but I think paying it off quicker with as much as is comfortable will have a snowball effect that reducing the repayments will not provide. I may be wrong because as you mention there is not a calculator to find out.

Calfuray

There are two ways to apply overpayments you make:

1) the bank will apply the overpayments to reducing your term, so your monthly payments will stay the same but the term will reduce
or
2) the bank will apply your overpayments to the monthly amount, which will reduce the monthly amount you pay but the term will stay the same.

From what you are describing, it sounds like your bank is doing option 2, hence your monthly payments have reduced by £3 as they have reduced your monthly payment using what you have overpaid, stretching over your term is what makes it a small amount.

If you want to reduce your term, you would need to phone and ask them to do option 1.

By doing what you are currently doing, the term will never become shorter, but the monthly payment will reduce: for example you monthly amount might get down to £10 for the last 3 years!
Either way you are still saving interest on the mortgage. Which way you do it is up to you.

I paid off money and reduce monthly amount until it was a comfortable level (assuming interest rises also), then after that I put my overpayments to shortening the term.