Nationwide-have I done the wrong thing?!

moneysavingwannabe

Hi,

Think I may have just done the wrong thing with my Nationwide mortgage!!

We have a flexible fixed rate.

We pay £411.04 a month and I thought I read on a thread that you could up the DD and still overpay by £500 a month.

I phoned and asked them to increase the payment to £500 a month.
They said they can only do it by setting up an overpayment of £88.96.
Which I have done.

I'm not sure if I should save the money and then overpay the £500 when I have it cos that would reduce the term of the mortgage??

Not sure we will be organised enough for that cos have money for lots of different things already. I think they try their best to confuse you.

Not happy cos worked out we have paid £20,000 in mortgage payments but only reduced mortgage total by £9,000. HMMMM :mad: :mad: :mad:

SO....HELP do I need to phone them back and cancel overpayment and squirrel money away somewhere until have £500???

lynnexxxo

Maybe I'm being thick there, but have you not set up to pay them an extra £88 each month - paying a total of £500 per month?

Surely if thats the case then the overpayment will reduce your interest on the capital - by saving up until you have an extra £500 to put in you would not save that interest.

moneysavingwannabe

Hi

I don't know am very confused! How do I work out if the interest saved would be more than if paid lump sum??

I think to reduce the term I have to pay £500 overpayment all at once. Which would mean £411.04+£500??

Does it matter if it doesn't reduce the term as we will probably move the mortgage before we pay it off as it has 19 years left??

I understand most things but not mortgages and the complicated way they do things!!:o

KTF

OK, you have not set up a £500 overpayment. You have set up an £88.96 overpayment (£500 less your normal mortgage amount). The £88.96 gets taken off the capital every month and the interest is then calculated on the remainder.

In order for an overpayment to reduce the term on Nationwide, the overpayment has to be for £500 in addition to your normal mortgage payment i.e. you would pay £411.04 as normal then a standing order for £500 as the overpayment making the total £911.04 a month.

moneysavingwannabe

Ok,

So should I save the £80 a month and then pay £500 when I have it or just stick with the £80 ish dd?

KTF

If you find a savings account that pays more interest after tax (assuming you are a tax payer) than the rate on your mortgage then you would be better holding it in a savings account then paying a lump sum off your mortgage either by overpayment or when you switch deals.

In reality (unless you have a very low fixed rate from a few years ago) most mortgages interest rates are higher than savings rates so you would get more benefit overpaying the mortgage than putting it in a savings account.

Nationwide also allow you to reclaim and overpayments should you find you need the money at a later date so any money you overpay isnt gone for good (although if you switch deals and dont ask for the overpayment back then new balance that is transferred will be your mortgage amount less any overpayments).

moneysavingwannabe

Hi,

Thanks for that, my mortgage rate is 5.49% so is still quite high.
Might be better to do lump sum then as reduces the term??
Am just opening a Halifax high interest current account so I suppose I could just leave it in there?? That is 6% (not very good with interest rates):o

KTF

Overpaying by any amount effectively reduces the term. Let me try and demonstrate.

If you have a 100k mortgage with a 4.5% interest rate over 25 years it will cost you £555.83 a month.

If you decide to overpay by say £250 a month making the monthly payment to £805.83 this is equivalent to having a mortgage with a 14.x year term (100k over 14 years is £803.38 a month).

So, for example if you remortgaged after 2 years you could either remortgage for 14 years (and have a high monthly payment) or remortgage for 23 years but continue to overpay as before. However, the advantage of overpaying (rather than reducing down the term) is that you can stop at any time and ate not stuck with a large mortgage payment each month.

Does this explain it?

To answer your question about the current account its 6% before tax. So assuming you are a basic rate tax payer (22%) that brings down the interest you would get from that account to 4.68% making overpaying the mortgage more 'beneficial'.

Edit: By using the calculator here http://www.channel4.com/money/homebuying/overpaycalc.html entering 67k at 5.49% over 25 years (as you havent stated the term and amount you have) as example figures gives you a monthly payment of £411.04. Overpaying by £88.96 is equivalent to having a mortgage term of 17.3 years and saves you £19308.10 in interest.

Enter your own figures to see the effect it has.

moneysavingwannabe

Hi,

Thanks for all your help!

I think I am getting the hang of it now :beer:

So......
It doesn't matter if Nationwide reduce the term because it is likely we will swap lender at the end of the fixed rate in 2 years. So won't incur any extra penalties?? We can get a mortgage for shorter length of time when swap?

What matters is the amount extra we pay cos reduces interest and amount owing?

Thanks again :T

Oh left to pay on mortgage 57,509.48 = 19 years
You were pretty close! We borrowed £67,000 over 25 years but have overpaid in last 3 yrs.

Woby_Tide

Nationwide treat overpayments as you doing one of two things, either reducing the term or reducing the monthly payment and keeping the same term. Your £88 overpayment may not reduce the term each month so will see nothing different, though every couple of months you may well actually be reducing the term by 2 months rather than 1 month. But until your annual statement I don't think Nationwide reflect your current outstanding term

Also bear in mind that with Nationwide your overpayments are actually always held in reserve, if you leave though they will disappear, i.e. if you overpay by £2000 one year, you can actually borrow that amount back the following year but at your existing mortgage rate

Jonbvn

KTF wrote: »

To answer your question about the current account its 6% before tax. So assuming you are a basic rate tax payer (22%) that brings down the interest you would get from that account to 4.68% making overpaying the mortgage more 'beneficial'.

A basic rate tax-payer pays 20% tax on interest not 22%.

An important issue that has not been mentioned is ISA's. You can save 3k per year in a cash mini-ISA, and the interest is tax-free. (3.6k next year!). NS&I ISA currently has a IR of 6.3% which is more than your mortgage rate. Accordingly, you should save up to the 3k limit in ISA's, then pay into your mortgage.