Leeds Building Society overpayments

geordie_ben

I'm looking to set up a S/O to make an overpayment each month

But after reading this I'm not too sure if it's worth it

"6. How can I reduce my mortgage balance more quickly?
In the current low savings rate environment, you may want to consider making overpayments on your mortgage. Some mortgages allow you to make overpayments and these payments can be made as an alternative to saving to help reduce your mortgage balance. The two most common ways to do this are explained below.
By paying a higher amount than the new payment quoted: You may, if you wish, choose to make monthly payments at a higher level than the payment quoted in your mortgage statement. Once the interest charged on your mortgage has been satisfied, together with any insurance premiums and fees (if applicable), any overpayments are deducted from the mortgage balance outstanding, although this may not affect the balance on which interest is charged until the following year.
By making a capital payment: You can also choose to make a lump sum capital payment at any time. In order to reduce the balance on which interest is charged with immediate effect, any lump sum capital payment must be for £1,000 or more."

http://www.leedsbuildingsociety.co.uk/mortgages/mortgage-statement/your-questions/

Does this mean I'd be better off saving up £1000 and then paying it off as a lump sum, than paying off say £100 a month as interest wouldn't be recalculated until the following year anyway?

Yorkie1

It partly depends on the interest rates for savings and mortgage.

Generally, savings rates are lower than mortgage rates at present, so as long as you have sufficient savings for a rainy day fund (often suggested to be 3-6 months' of outgoings), and don't think you'll want the money back, then overpaying the mortgage will be better if its interest rate is higher than putting it in savings.

This assumes that interest is calculated daily on the mortgage. This is usually the case, although with some lenders they only recalculate monthly repayments annually.

When overpaying, you sometimes get the choice as to whether they reduce the term or the repayments. Say you overpaid by £100 per month on a 25 year mortgage on a 5 year fix. At the end of the first 5 years, that's £6K off the capital. At the end of the 5 years, you will either have 20 years left with lower repayments, or you'll have fewer years at a higher repayment level.

If you continue overpaying then you'll end the mortgage at the same time irrespective of which route you take, but keeping the mortgage term as the same gives you the flexibility of lower payments if that suits your circumstances.

geordie_ben

Reading the info I quoted above I read it that overpayments are only calculated annually... but I may be wrong?

My rate is 2.29% on a 2 year fix (22 months left) and I can get 3% before tax on savings so they're not far apart

Imma_Number

...any overpayments are deducted from the mortgage balance outstanding, although this may not affect the balance on which interest is charged until the following year.

It says "may". It'll depend on your mortgage T&Cs. You can probably call them up to check.