Difference between overpay and part redemption

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  • dhbedsondhbedson Forumite
    41 Posts
    Part of the Furniture Combo Breaker
    jimmybrid wrote: »
    I have a slightly different take on this than nxf, maybe an example will help to explain:


    Let's say you normally pay £750 per month on your mortgage over a 25 yr term (300 payments). If you make a single overpayment of £750, but your normal payment stays at £750, you pay off your mortgage one month early (299 payments) thanks to that overpayment.
    If the £750 payment were taken as a part redemption, the lender would recalculate your monthly payment to spread the remaining borrowing over the full term. Although your monthly payment would drop (very slightly in this example) you would not pay your mortgage off early (still 300 payments) and your overall interest payments would be higher than if you classed your one-off payment as an overpayment.


    My view, tell them it's an overpayment.


    When I got the letter, this is exactly what I thought the case was... although I am also very surprised that I am struggling to find anywhere else on the internet, apart from this thread, where it has ever been mentioned!
  • nxfnxf Forumite
    14 Posts
    jimmybrid wrote: »
    I have a slightly different take on this than nxf, maybe an example will help to explain:


    Let's say you normally pay £750 per month on your mortgage over a 25 yr term (300 payments). If you make a single overpayment of £750, but your normal payment stays at £750, you pay off your mortgage one month early (299 payments) thanks to that overpayment.
    If the £750 payment were taken as a part redemption, the lender would recalculate your monthly payment to spread the remaining borrowing over the full term. Although your monthly payment would drop (very slightly in this example) you would not pay your mortgage off early (still 300 payments) and your overall interest payments would be higher than if you classed your one-off payment as an overpayment.


    My view, tell them it's an overpayment.

    Interesting Jimmybird.......I enjoy listening to as many different approaches to try and seek the holy grail!........

    But.....
    If the £750 payment was taken as a part redemption then your monthly payments would drop (a very small amount), this would leave more money to overpay each month, which if overpaid would (in theory) pay off the mortgage one month early (299 payments).

    I say in theory, because actually by paying a reduced amount each month, you are also paying a reduced amount of interest each month which builds up over those 299 payments. It is this reduced interest that is a real benefit.

    I think when you say ..."your overall interest payments would be higher..." you are basing it on 300 payments and have not calculated using those small reductions as an overpayment?

    The methodology I use is a spreadsheet I found on this website, which I have heavily adapted to include my maximum 10% overpayment per year allowance plus the effect of having the surplus money (once I have hit that 10%) in my Santander account (to get the 3% interest on balances £3,000 to £20,000). I can instantly see what difference an overpayment would make to both the duration and the total amount. It has been a godsend!

    On a 5year fixed rate mortgage, I am on target to pay it off in exactly 5 years with £21,474.55 to pay in interest.
  • I too have searched long and hard for a definitive answer to this - I raised a similar topic a few weeks back.

    See here:

    http://forums.moneysavingexpert.com/showthread.php?t=5029590

    The lenders certainly don't make it clear what the differences of overpayments/capital repayments! At least you have the option - my mortgage doesnt!
  • My worry would be that if you if you had a reserve this would be affected and if you ever wanted to port a low interest rate onto a different house the part redemption would reduce the amount that you would be allowed to port.

    I think you need more information from Barclays (preferably in writing) about how this decision would affect your mortgage and any future plans.
    My question may be simple...but please don't assume that I am :wink:
  • Relating to:

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    Why hasn't my monthly payment amount reduced after I started making overpayments?

    Overpayments reduce the mortgage balance you pay interest on but that doesn’t mean your monthly payment amount will change.

    If you’d like to reduce your monthly payment amount, you need to make a capital repayment – an additional payment that’s at least 3 times your usual monthly repayment. Then you can visit a branch or call us on 0800 022 4022 and ask us to recalculate your monthly payment. Lines are open 8:30am to 5:30pm, Monday to Friday, and 9am to 1pm on Saturday.
  • andrewmpandrewmp Forumite
    1.6K Posts
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    ✭✭✭
    One thing worth considering is that a lot of products only allow 10% overpayments per year.

    If you get close to this already, if your payments reduce, you'll be able to overpay less.
  • NavalNaval Forumite
    1 Post
    I got the same letter and will complain about Woolwich/ Barkley to Ombudsman. They are very nasty and misleading. They even tricked me and I have an engineering degree! So they call it 'overpayment' but they just reduce the total figure without recalculating interest. When you borrow money, you get charged monthly interest. Overpayment does not reduce the interest so what is the point!!? Sending letters with words like 'we are reducing the capital without reducting the payments' is so misleading because they mean you'll still pay the same interest on the amount you originally borrowed. So the extra money you paid in is not earning any interest. Nasty!! Why would you overpay then?!
  • 219169219169 Forumite
    6 Posts
    Second Anniversary
    MoneySaving Newbie
    I spoke to Barclay this morning and this was explained:

    >Overpayment reduces the term time but not the monthly payment
    >Part-redemption reduces your monthly payments but not the term time
    >All extra payments goes towards Part-redemption unless we call and change to overpayment

    Please correct me if I am wrong.
    Thanks
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