Help with overpayment

Pursey

Hiya, I could really do with a bit of help. I am currently with Nationwide for my mortgage and they allow a £500 monthly overpayment. I am trying to make overpayments each month but have been asked if I:

A) Want to reduce my term
Want to reduce my future payments or
C) Keep my existing payment and term as-is. (At the next natural mortgage payment change, i.e. interest rate change, my payment will be automatically recalculated).

I know I don't want the payments to reduce as it will affect my overpayments, but am confused by which of the other two would be better. Can anyone help?

edinburgher

I opted for A.

muddywhitechicken

edinburgher wrote: »

I opted for A.

Me too - I don't understand C!

Pursey

That's what confused me, I'm not sure what the difference is apart from the term is continually recalculated during the 5 years fixed, versus being reduced all in one go after 5 years?! Maybe I'm missing something important. Thanks for your responses. Does anyone have any idea of the difference?

Calfuray

Sorry, wrong info

Imma_Number

Calfuray wrote: »

C is basically the worst thing you can do. OPs would be held in 'reserve' but not actually applied to the mortgage, so you wouldn't be saving any interest. Then, the next time a change happened, like interest rates going up, the OPs would be applied to do B, i.e. recalculate the monthly payment.

I'm sorry but that's completely untrue.

I've used Option C for the more than 7 years. You can check online and see that your overpayments on option C reduce the balance and hence the daily interest.

Option C keeps the regular payment the same resulting in paying of more of the capital sooner. The official term of the mortgage stays the same but you end up getting the balance to zero faster.

Option B makes regular overpaying a pain as each time the regular payment reduces you have to up the amount you overpay to compensate.

If this is unclear I'll illustrate with some examples.

Calfuray

Imma_Number wrote: »

I'm sorry but that's completely untrue.

I've used Option C for the more than 7 years. You can check online and see that your overpayments on option C reduce the balance and hence the daily interest.

Option C keeps the regular payment the same resulting in paying of more of the capital sooner. The official term of the mortgage stays the same but you end up getting the balance to zero faster.

Option B makes regular overpaying a pain as each time the regular payment reduces you have to up the amount you overpay to compensate.

If this is unclear I'll illustrate with some examples.

Oops, sorry! What you're saying makes sense. I guess either I misunderstood N@tionwide woman or she didn't understand it herself. Hm. That does seem quite a good option then!

Imma_Number

Calfuray wrote: »

Oops, sorry! What you're saying makes sense. I guess either I misunderstood N@tionwide woman or she didn't understand it herself. Hm. That does seem quite a good option then!

I think it's an excellent option

You do get a "reserve." It's just a totting up of all your overpayments that you can then draw against. But it really really is applied to the mortgage balance.

Pursey

Would you mind explaining whether a or c is better and why. Sorry if that is a stupid question, I just can't see how it would be different. Is it something to do with interest? I think option a would keep the payment the same too wouldn't it? Which would you choose of the two?

edinburgher

We can't tell you which you should choose, because we're not qualified to give advice.

As Imma Number explains, C lets you create a reserve that you can draw against (i.e. take the money back), but gives you the benefits of A (i.e. reduced interest payments).

Option C seems to offer the benefits of option A, except you can get some money back if needed to cover a short term emergency.

If not and the money remains untouched, you still finish your mortgage term quicker.

Imma_Number

Before I go into my long explanation, if you made an overpayment of £499.99 or less it would be treated like Option C. Only at £500 and over do you get the choice.

For the sake of example: Mortgage of £100,000 over 25yrs at 6% & no Early Repayment Charges. Then at 24 months we'll put in a single payment of £50,000 and see how that affects things. Regular overpayment will be the same idea but smaller differences that add up over time. I'm also assuming that the interest rates don't change over the entire time of the mortgage to make the comparison easier.

Regular payment of £644.30
Month 1: Payment of £644.30 (Interest: £500.00, Capital £144.30) Balance £99,855.70
Month 2: Payment of £644.30 (Int: £499.28, Cap: £145.02) Balance £99,710.68
etc
Month 23: Payment of £644.30 (Int: £483.27, Cap: £161.03) Balance £96,491.97
Month 24: Payment of £50,644.30 (Int: £482.46, Cap: £50161.84) Balance £46,330.13
All perfectly normal to this point.

Option A: The Building Society recomputes the term keeping the payments the same, which in this example, reduces the remaining term from 23yrs to 7yrs 6months with payments of £644.30 pcm.
So you must pay it off in 7yrs, 6months time due to the reduction in term. (I believe NW will write to you an advise you of the reduction in term but I've never done it so I'm not sure)
Month 25: Payment of £644.30 (Int: £231.65, Cap: £412.65) Balance £45917.48

Option B: The BS keeps the remaining 23yr term untouched and recomputes the payment giving 23yrs of £309.88pcm (I think NW have to write to you to advise you of the change of payment but I've never done it so I'm not sure)
Month 25: Payment of £309.88 (Int: £231.65, Cap: £78.23) Balance £46,251.90

Option C: The BS keeps the 23yr term untouched, and the payment the same. So still paying in at £644.30 pcm, the date the mortgage has to be paid by is still 23yrs in the future *BUT* the balance will reduce like it does in Option A. ie in 7yrs and 6 months the balance would be zero and the mortgage effectively paid off but *before* the term of the mortgage.
Month 25: Payment of £644.30 (Int: £231.65, Cap: £412.65) Balance £45917.48

The difference between A & C at this point is you are using part of the regular £644.30 as an overpayment in Option C (I'm not sure if that bit gets added to your reserve), but it's all regular payment with Option A.

If/When interest rates change Option A will be re-calculated on the remainder of 7yrs 6months term while Options B & C are re-calculated on the remainder of 23yr term. This will cause Options A & C to be different from that point on. Whenever my payments went down I increased my separate monthly overpayment upwards by the same amount.

One of the things that Nationwide has is is an option on the website to switch between the options for the next overpayment of £500 or over (View Accounts | Mortgage | Overpayments (in the right hand menu))

I chose Option C because the payment stayed the same (like in Option A) which meant less fiddling with overand the term stayed at the full 25years (like in Option which is great for flexibility.
It also means that it's the same for overpayments of more than £500 as it is for those less than £500.

I hope this long post has been helpful and nor more complicating