Overpayment - What would you do?

SOMEONE_3

getmore4less wrote: »

Well if you really can get the money back and they don't change that in 3 years.

price up.

switch mortgage 2 to the lower cost tracker for 3 years.

Overpay 1 by £500pm for 3 years then take it back and pay off 2 as it reverts to 3.99% all those 500s are now at base+2%

Still leaves working out what to do with the £50k.

So in theory I could switch the whole Loan 2 to a new tracker at 2.29%. Pay £1500 ERC and overpay £48,500 into Loan 1. Continue to pay the remaining £45K..ish loan 1 monthly at 5.34% for 3 years and over pay by £500 each month. Just before the 3 years is up, borrow back the value of loan 2 on loan 1, and as soon as loan 1 reverts to the BMR, pay off loan 2's SMR effectively making it +2%. Leaving me with just loan 1 and loan 3 for the rest of my days at +2%

Is that right?

JimmyTheWig

SOMEONE wrote: »

So in theory I could switch the whole Loan 2 to a new tracker at 2.29%. Pay £1500 ERC and overpay £48,500 into Loan 1. Continue to pay the remaining £45K..ish loan 1 monthly at 5.34% for 3 years and over pay by £500 each month. Just before the 3 years is up, borrow back the value of loan 2 on loan 1, and as soon as loan 1 reverts to the BMR, pay off loan 2's SMR effectively making it +2%. Leaving me with just loan 1 and loan 3 for the rest of my days at +2%

Is that right?

Yes, that's exactly right. Would be worth ensuring that you have it in writing that you can get the overpayment back. Make sure there's no smallprint that means it's the £500 a month overpayments you can get back and not the large overpayments on which you pay ERCs.
But yes, if you can get the overpayment back in the future then absolutely the right thing to do is overpay the highest interest loan and then get it back when that loan becomes the lowest interest one.
I'd take the theory further than that, too.
Don't bother using the £500 allowance on loan 2 right now. Use any money you have right now to pay off the mortgage to pay off loan 1. Don't use so much in the here and now that means you don't have the £500s to pay off loan 1 each month, but I think from memory you can do that from income anyway.

One more point...
This (getting your overpayments back to pay off the highest interest loan at the time) is such a good plan that it is worth exploiting further.
In three months time when you are switching loan 2, can you apply for more money? So you'll get a loan 4 which will pay off loan 2 completely and give you cash in your bank account.
Use this cash to make an overpayment (paying the ERCs) on loan 1.
Then, again, when loan 1 reverts to the good rate get all these overpayments back again and pay them off what I am now calling loan 4.
Obviously whether you are allowed to borrow more money will depend on income, affordability, LTV, credit check, etc.

SOMEONE_3

JimmyTheWig wrote: »

Yes, that's exactly right. Would be worth ensuring that you have it in writing that you can get the overpayment back. Make sure there's no smallprint that means it's the £500 a month overpayments you can get back and not the large overpayments on which you pay ERCs.
But yes, if you can get the overpayment back in the future then absolutely the right thing to do is overpay the highest interest loan and then get it back when that loan becomes the lowest interest one.
I'd take the theory further than that, too.
Don't bother using the £500 allowance on loan 2 right now. Use any money you have right now to pay off the mortgage to pay off loan 1. Don't use so much in the here and now that means you don't have the £500s to pay off loan 1 each month, but I think from memory you can do that from income anyway.

One more point...
This (getting your overpayments back to pay off the highest interest loan at the time) is such a good plan that it is worth exploiting further.
In three months time when you are switching loan 2, can you apply for more money? So you'll get a loan 4 which will pay off loan 2 completely and give you cash in your bank account.
Use this cash to make an overpayment (paying the ERCs) on loan 1.
Then, again, when loan 1 reverts to the good rate get all these overpayments back again and pay them off what I am now calling loan 4.
Obviously whether you are allowed to borrow more money will depend on income, affordability, LTV, credit check, etc.

Hmmm, this could get complicated, and exciting!:j

I can definitely borrow more on Loan 2. I'm earning £10K more salary since I took that loan out, I've overpaid £3000 of it back and by then I would've overpaid Loan 1 by about £113K. There's nothing stopping me paying that £50K off of loan 1 today and just paying the ERC.

So you think maxing the borrowing on Loan 2 to pay off Loan 1 (but not completely to keep it open), is the way forward here? Even though they'll be 3% ERCs for every payment?

I understand your theory, I'm just not sure how the figures stack up

many thanks

SOMEONE_3

Borrowing more of course also becomes easier as my loan to value has changed dramatically in the last 12 months since building the extension I took loan 2 for. We've spend £75K on a build that probably adds £150K to the value of the house.

Nationwide still have us valued at £408K, but I know it would be at least £550K now, however they wouldn't send someone out to revalue unless I was borrowing more, which I could now be doing, maybe, if I can get my head around borrowing at 2.29% to pay off at 5.34% with 3% fees :eek:

JimmyTheWig

SOMEONE wrote: »

Hmmm, this could get complicated, and exciting!:j

It is, isn't it.
I haven't had this much fun thinking about a mortgage since I did my last one (also in three parts)!

I can definitely borrow more on Loan 2. I'm earning £10K more salary since I took that loan out

Sounds promising.

've overpaid £3000 of it back

Any of it on loans 2 or 3? If so, ask for them back and plough them into loan 1!!

and by then I would've overpaid Loan 1 by about £113K.

Yes, that's the beauty of it. The more you pay off loan 1 the more you can then borrow to pay more off loan 1

There's nothing stopping me paying that £50K off of loan 1 today and just paying the ERC.

I assumed that the £50k was maturing in a few months. If you've got it now pay if off loan 1 now.
(Assuming that the ERCs aren't about to go down. On some products I've seen the ERCs go down each year.)

So you think maxing the borrowing on Loan 2 to pay off Loan 1 (but not completely to keep it open), is the way forward here? Even though they'll be 3% ERCs for every payment?

Yes, that's exactly what I'm saying.
I agree don't pay off loan 1 in full as you need to get the overpayments back in three years time.

I understand your theory, I'm just not sure how the figures stack up

It's actually quite simple.
Now we're talking about the ability to get your overpayments back (this is important that you get this confirmed!) then all we need to do is concentrate on the next three years.

Your choices are to pay money off loan 1 - which costs 3% ERCs up front and saves you 5.34% - or pay the money off loan 2 - which saves you at most 3.99% (if you don't move this to a new deal).
Lets look at the £50,000.
If you reduce loan 1 you can do so by £48,544 and pay £1,456 in ERCs. 5.34% of £48,544 for three years is £7,777. Which means you will save £7,777 - £1,456 = £6,321.
If you reduce loan 2 you can do so by £50,000 and pay no ERCs. 3.99% of £50,000 for three years is £5,985.
So you are £336 better off by reducing loan 1.
Obviously if you reduce the interest rate on loan 2 (which sounds like a no-brainer) then that makes reducing loan 1 even better value comparatively.

If this is true for the £50,000 then it is true for any spare money you have.


The only risk is that interest rates go up in the next few years. E.g. you move loan 2 onto a variable rate currently 2.29% having paid a chunk off loan 1 and paid the ERCs.
Interest rates then shoot up (extreme example) and the new loan 2 is now costing you 6.29%. Loan 1 is still fixed at 5.34% so you'd be better off if the money was reducing the new loan 2. Obviously you can get the overpayment back and pay it off the new loan 2, but by that point you've already paid the ERCs.
For this to make paying it off loan 1 the wrong thing to do, interest rates would have to go up by 2% straight away if you went for the 2.29% deal. If the interest rate rise wasn't straight away then the rise would have to be greater to have made it not worth paying the money off loan 1.

JimmyTheWig

Sorry, just seen the length of my last post. Oops!

SOMEONE_3

Glad I've found someone who loves this stuff.

To clarify on my overpayments to date.
(which have all come from chipping away at the inheritance and not my income. But once my monthly payments go down I can put them back up with overpayments from earnings).

Loan 1: £60,000 lump sum paying £1800 in ERCs Oct 2013.
6 x £500 monthly overpayments between Sept 2013 - Feb 2014.

Loan 2: 6 x £500 monthly overpayments between Sept 2013 - Feb 2014.

I've made no overpayments on loan 3.

I'm pretty certain I can ask for the overpayments on Loan 1 back, but obviously don't want them back until May 2017. I need to ask and get in writing exactly what I'm entitled to back, whether it's just the monthly overpayments, the lump sum or both. Once I have that info I can judge whether or not pay the £50K sitting in my bank into loan 1 too.

I'm not so certain about loan 2, so that's another question to ask (or dig the paperwork out on). Loan 1 is a fixed rate, and loan 2 is a tracker. I recall hearing something on the call yesterday that said I couldn't borrow back on a tracker, but not sure it that applied to the current tracker or the future tracker.

It's 1st March tomorrow, so I was due to overpay £500 into both Loan 1 and Loan 2, but will now leave loan 2 alone for a week until I have more info. If I can borrow back from from loan 2 it will only be the £3000 to date, so not a huge amount that'll cost me 90 quid to pay into loan 1 instead.

What's the advantage to borrowing this back no as opposed to borrow it as additional when I switch loan 2 to the 2.29% deal?


I wonder if the fact loan 1 is called "mortgage" and loan 2 & 3 are "further advances" affects any of this?

thanks!

getmore4less

AIUI NW changed the rules at some point so you have to be carefull and check.

One thing with the shuffle and paying the ERC , you must be able to fund the £500pm overpayments on 1 for a minimum period, will depend on the rates you end up on on how long that will be.

£500 costs £2.255 pm erc is £15 so a minimum of 6-7months

the £500 will also be saving money if it paid of another part of the loan or some interest if sat in a savings account so add than and it will be longer to break even.

There is another factor that complicates even further is the current terms, you could play with those to change the contractual payments on each part.

no it really starts to get complicated working out the best option, with the unkowns of interest rates and what NW might decide to do with there T&C's.

SOMEONE_3

Is there a smiley for my head hurts?

SOMEONE_3

I think I may need to ignore the smaller factors, to avoid driving myself mad and stick to a decent easy to follow plan.

Even if I did nothing but pay £50,000 with ERCs into loan 1 now, and switched loan 2 to a new lower rate. That's already a big improvement on the info I had last week.

Then maybe just look into extra borrowing on loan 2 and pay it off directly into loan 1.

Then look into borrowing back on loan 1 in 3 years time to pay off loan 2 & 4, and I'll be on +2% for life there on.

I think the rest of it may just confuse me and i'll mess something up costing me thousands