Overpaying mortgage question

dax42

Hi all,

I'm on my first mortgage so please excuse this noob question! With the interest rate really low, I'm able to overpay my mortgage quite a bit and would like to do so. I'm with Nationwide, I can overpay up to 10% of my original mortgage amount each year. If I overpay more, there's a penalty.

Their website on overpayments states that if I overpay by £500 or more, they will reduce my monthly payments, unless I tell them to change my term instead. I definitely don't want to reduce the term, but ideally I don't want to reduce the monthly payments either! So instead I was considering just doing lots of overpayments of £499 each.

Now the question is, let's say I make all my allowed overpayments this month in £499 steps. This shouldn't reduce my monthly payments (as I understand it), but wouldn't that lead to me essentially overpaying more than my allowance in the next months? After all, the monthly payment is fixed and consists of paying interest as well as paying off some capital. Now that I've just reduced the balance of my mortgage, the monthly payment will pay off more capital... Will this then be counted toward my overpayments and incur a penalty?

Would be great if you could advise me on how best to overpay.
Thanks!

nuzik

no its 10% from may 2013 before that its £500 per month. Thats 10% of the inital mortgage you took with them in a calander year. Anything over £500 recalculates your monthly amount, anything below doesn't. They charge daily interest so if you can afford to pay in a lump sum rather than monthly you'll save pennies there as well.

dax42

nuzik wrote: »

Anything over £500 recalculates your monthly amount, anything below doesn't.

Exactly. So my idea is to make lots of £499 payments within a few days, essentially a lump sum that doesn't make them recalculate my monthly amount. The advantage for me would be that the next monthly payments would consist of less interest and thus I'd pay off even more capital, in essence giving me a way to overpay more than the 10% per year that Nationwide allow without penalty!
Unless of course they do charge a penalty for that, which was exactly my question. Would they? Or is this a (tiny..) loophole?

I hope this makes sense.
Cheers!

nuzik

just pay in a lump sum, your interest is calculated daily, they can change your direct debit to what you were paying the amount changes. Its not costing you any money. I dont follow what you want to achieve by the 499.

Thrugelmir

dax42 wrote: »

in essence giving me a way to overpay more than the 10% per year that Nationwide allow without penalty!
Unless of course they do charge a penalty for that, which was exactly my question. Would they? Or is this a (tiny..) loophole?

I hope this makes sense.

Not really.

If you owe £100,000 at the start of the year. Then you can overpay by £10,000 in the following year without incurring a penalty.

Go a £ over and they'll impose a penalty.

How you make the overpayments makes no difference.

Their website on overpayments states that if I overpay by £500 or more, they will reduce my monthly payments, unless I tell them to change my term instead.

Does it matter? All you have to do is increase your overpayment to compensate for the amount the monthly payment reduces.

Sounds as if you are over thinking. Focus on the benefits of making the overpayments as early in the year as possible.

Flower1976

Hi there
With nationwide you can give an instruction on Internet banking that overpayments should not reduce your term and that you do not want your monthly payments recalculated either. I make overpayments regularly of various amounts and my monthly payments stay the same.
Flower

garfy1

Flower1976 wrote: »

Hi there
With nationwide you can give an instruction on Internet banking that overpayments should not reduce your term and that you do not want your monthly payments recalculated either. I make overpayments regularly of various amounts and my monthly payments stay the same.
Flower

This is true. Get set up with Internet banking and its all explained there.

Also, are you on Nationwides SVR of 2.5%? I am and when I recently spoke to an advisor there I was informed I could repay as much as I wanted, not the £500 a month I was previously told. This will only be the case if you are on the SVR and not in a fixed rate deal.

nuzik

garfy1 wrote: »

This is true. Get set up with Internet banking and its all explained there.

Also, are you on Nationwides SVR of 2.5%? I am and when I recently spoke to an advisor there I was informed I could repay as much as I wanted, not the £500 a month I was previously told. This will only be the case if you are on the SVR and not in a fixed rate deal.

you are not on the SVR you are on the BMR

dax42

Thanks for your reply, Flower. Do you ever overpay more than £500 in one go? Is your 'normal' bank account also with Nationwide? I'm just asking because my internet banking is with Santander, so how would I, when instructing them to make a transfer to Nationwide, specify that I don't want the monthly payments to go down? They don't have anything to do with my mortgage...

I'm going to try and clarify my original question a bit more with an example here. Say I borrowed £100,000 at the start of the year as suggested by Thrugelmir. Let's say I pay 3% interest on this, then the mortgage calculator says that I'd pay £474 per month (25 years term). If I overpay my full £10,000 allowance for the year right at the start of the mortgage, then it should be essentially as if I had only borrowed £90,000. For a 25 year mortgage this should result in payments of £427 per month.

If I can get Nationwide to NOT reduce my monthly payments despite making this big lump sum payment, I'd pay £47 more per month than I'd need to. Since interest is calculated daily, this would mean those £47 would go towards reducing my debt. If they let me do this without penalty, it would mean I could overpay almost £600 more per year!

It depends a bit on how they define overpayments, I think. Obviously making any extra payments are overpayments. However, those monthly payments are collected by them by direct debit, so they're not really active overpayments, right..? So if I could get them to not reduce my monthly payments despite the £10,000 lump sum at the beginning, they effectively let me overpay £10,600 over the first year, despite the limit being 10% and not 10.6%!

Please let me know whether this makes more sense now.
Thanks!

nuzik

ok you have a mortgage of 100,000 then you can overpay to 10,000 per year without charge. You can't beat the system its done automatically.
So if you pay 10,000 then keep your direct debit the same you are overpaying. However if you reduce the term going through the correct process and committing to a shorter term you can pretty much do as you say. But that would be actually reducing the term that would be the only way to do what you want to do; otherwise its just 10% of the 100k

Flower1976

Hi there
Yes my bank account is also with nationwide and we transfer payments from that account to the mortgage on internet banking.
Can you view your mortgage on internet banking with nationwide?
If you can then you can go into the mortgage account and click on the overpayment section on the left hand side.
On that screen it you give your instructions of how you want any overpayments to affect your account.
If you overpay by less than 500 they will not recalculate your monthly payments. For any payments above 500 you can choose whether to reduce your payment, term or neither.
You are right that if you don't have your payment recalculated, more of your normal monthly payment will be paying off the capital but this is not classed as a further overpayment and does not form part of your 10%. It is not over your contractual monthly payment.
Hope that helps.
Flower