Overpayments: Term vs Amount

steeeb

I have seen similar questions to this but they seem to answer the question of a term of say 25 years vs term of 30 years and paying the same amount = no difference, but that is not my question as such.

I have a mortgage with RBS and make frequent overpayments via online banking as-and-when. I have just found out that these overpayments come off my amount paid rather than the term (the direct debit is the same amount, so I'm in affect making small overpayments each month which are getting bigger and bigger as I overpay).

I assume they do that as it works out better for them. They said I need to fill in some form and pay £35 to change it to reduce the term instead.

So, this is beyond my maths skills - does it work out better me doing this and changing it to reduce the term, or does it in fact not matter.

averageish

Hi steeeb,

I am doing this myself at the moment. My understanding is that you need to request that the additional payments are deducted from the capital balance, rather than split between interest and capital as you seem to be doing at present.

Is the £35 a one off charge or per over payment? I've read about some people having issues with irregular over payments, where administration fee's were being charged every time, as the fee is for recalculating your account balances.

If I'm wrong, someone will be along to correct me shortly.

Watching with interest.

CLAPTON

all overpayment come off the capital
there is no interest owing so it's impossible to deduct from nothing.


in effect this reduces the term : many lenders don't actual change the formal terms unless you ask

SG27

It doesn't matter what way you do it. Both ways will save you the same amount of interest and both ways ultimately pay the mortgage off earlier.

Edi81

Pre MMR some lenders would let you choose if you wanted to reduce the term.
As a reduction in term is a contractual change lenders can use this to make you reapply and jump through hoops.

You are best just to reduce the balance, continue making your payments and the term will naturally reduce.