The correct way to use the mortgage calculator

shopndrop

Reading what some of you have achived on here has inspired my son.

Have never used the mortgage calculator before and we were playing around to try and help him see what a difference making an overpayment to his mortgage will make but struggling with the overall amount to be paid using some different options.

Using the figures of a repayment mortgage of £150k over 24 years at 2.89%, his payment is £723 per month, giving an overall amount to pay £208159.

Have convinced him to use some savings he has in an ISA from previous year and makes an overpayment of £5000 now, this would make an overall amount to pay of £203314. So far so good.

Now for the query: By making an overpayment, we changed the amount of mortgage outstanding to £145k which would reduce the monthly payments to £699 pm. He is happy to continue to pay the same amount each month as he is currently paying so based on these figures would overpay each month by £24.

The problem we are having is working out the impact overall and the correct way to do it. His aim is to reduce the term of his mortgage, not the monthly amount at the moment.

Do we put the original figure of £150k with a lump sum overpayment of £5k and a monthly overpayment of £24 which gives an overall amount to pay of £200689 or do we reduce the outstanding amount to £145k and just put in overpayment of £24 per month which gives £198302. The difference between the 2 different ways of calculating is £2387. We know these are only small differences in the overall total, but he needs to see that these small amounts can add up.
Does anyone know which is the correct way of calculating this

Once we get the basics correct we can them play around with making additional overpayments and seeing what can be done.

LplateSaver

What mortgage overpayment calculator are you using? The MSE one assumes you want to decrease the mortgage term and so keeps your monthly repayments the same.

According to the MSE calcuator

Overpaying £5000 now would save you
£4,845 in interest alone,
and mean you pay it off in full
1 year and 2 months earlier.

Heres the MSE Calculator: http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

But if he put that £5000 in an isa earning more than 2.89% or a current account earning more than 3.6% (eg Lloyds club) instead of overpaying the mortgage he would have saved a lot more money.

shopndrop

Thank you so much. Was using the MSE one but hadn't realised it kept monthly repayments the same. Note to self, read through thoroughly before using next time. Appreciate your help.

gavted

The MSE calculator is pretty simple and gives you a clear result on this.

£145K over 24 years gives a total paid of £201221.
Using the £24 per month overpayment gives a total of £198302, a saving of £2918. But you also finish 14 months early, so your actual saving is £6128 (£12704 - £6576).

If he can afford it, using the ISA money to reduce the initial amount borrowed is best policy, and then overpaying, even a small amount will make a big difference. Once he starts, he will find extra money to add to the over-payments.

LplateSaver

gavted wrote: »

£145K over 24 years gives a total paid of £201221.
Using the £24 per month overpayment gives a total of £198302, a saving of £2918. But you also finish 14 months early, so your actual saving is £6128 (£12704 - £6576).

I don't know where you've pulled your figures from but overpaying a mortgage allows you to reduce the term or reduce the payment not both. If you reduce the payment you'll end up spending pretty much the same amount on the mortgage..

gavted

The figures are straight from the MSE calculator.
The reduction in overall payment is due to the reduced interest in borrowing the money for less time (as most banks apply over-payments to the capital value borrowed, thereby reducing the term). Maybe I did not make that clear enough.

LplateSaver

gavted wrote: »

The figures are straight from the MSE calculator.
The reduction in overall payment is due to the reduced interest in borrowing the money for less time (as most banks apply over-payments to the capital value borrowed, thereby reducing the term). Maybe I did not make that clear enough.

Her son had a 150k over 24 years at 2.89% your figures are grossly wrong and will only confuse the OP.

Her sons mortgage is £723 per month.
He has now overpaid by £5000. This will reduce the term not the monthly payment amount.
The monthly payment is still £723 not £699. There is no £24 a month overpayment this was the OPs misunderstanding of how mortgage overpayments work.
As I have stated he has saved £4845 off his total interest payable and reduced the term by 1 year and 2 months..

Seanymph

I thought you could do either - either reduce the monthly amount paid, or reduce the term?

Although I can't reduce the term, because when they get to the end of the fixed period apparently the recalculate to the same term as at the beginning.

LplateSaver

Seanymph wrote: »

I thought you could do either - either reduce the monthly amount paid, or reduce the term?

Although I can't reduce the term, because when they get to the end of the fixed period apparently the recalculate to the same term as at the beginning.

You can but reducing the term saves a lot more money.

In the OPs case its different because she stated her son would make up the difference so it's almost the same.

Basically in OPs case her son has these options.

a) Pay the £5000 and reduce the term to 22 years and 11 months with the monthly payment remaining £723. That would save him £4845.
b) Pay the £5000 and keep the term 24 years but reduce payments to £699. That would only save him £1939 and is the worst option.
c) Pay the £5000, keep the term at 24 years and pay £24 to keep the payment at the orginal amount. That would save the son £4830 round about the same figure as a.

Anyway that amount is no where near £6128 which is why I was saying that gavteds calculations are wrong. Im not sure but he appears to be reducing the term and payment, sorry if I've confused you seanymph. I have never heard of you not being allowed to reduce the term, I'd pay the difference into a 6% regular saver and pay it into your mortgage when the fix rate comes to an end.


Natwest has a good overpayment calculator if you want to put in the amounts yourself and see the difference between reducing the term and reducing the amount.

http://personal.natwest.com/personal/mortgages/mortgage-tools/mortgage-overpayment-tool.html?view=int