Over paying mortgage, think I am doing right thing

getmore4less

Collision wrote: »

@getmore4less is that right, was wanting to pay a chunk off mortgage 10k, should I reduce term or paynents or just pay 10k off? Whats the best to do?

Makes no difference to the end result if you are still paying £1kpm.

By reducung the contractual payment you have the choice later to reduce your payment if you find something else for the money.

People think the term is relevent it's not(other than set the minimum payment).

It is the payments that determine how long your mortgage lasts and how much it costs.

Greenst

Hope you don't mind me asking too! Just I was talking about making overpayments last week with a friend she is lucky enough to have a relatively small mortgage of £40k. It has a 10% yearly limit for overpayments. We also were trying to work out if it's better to pay a 4k lump sum now or monthly payments over the next 12. Months? Paying the lump sum would still leave some money in the bank for emergencies. Interest rate is 3.69% I believe and outstanding term is about 10 years.

SAHD_Jim

Greenst wrote: »

Hope you don't mind me asking too! Just I was talking about making overpayments last week with a friend she is lucky enough to have a relatively small mortgage of £40k. It has a 10% yearly limit for overpayments. We also were trying to work out if it's better to pay a 4k lump sum now or monthly payments over the next 12. Months? Paying the lump sum would still leave some money in the bank for emergencies. Interest rate is 3.69% I believe and outstanding term is about 10 years.

First, you should always keep enough accessible for emergencies.

Second, if you can get a better return on your savings to offset the cost of the mortgage interest then you'd be better off saving the lump sum than paying it off the mortgage immediately. Of course for a basic rate tax payer though this would mean finding a gross interest rate of about 4.6% on savings, so chances are the immediate payment would be the way to go.

Greenst

Yep as I said there is an emergency fund. So assuming 4.6% isn't possible is it better to pay the lump sum now or spread the payments? Looking at an earlier reply I would assume the lump? But shes in year 3 of a 5 year fixed rate so would this still reduce the interest? Sorry if I sound dense but we couldn't work out what's the best option

anna42hmr

Greenst wrote: »

Yep as I said there is an emergency fund. So assuming 4.6% isn't possible is it better to pay the lump sum now or spread the payments? Looking at an earlier reply I would assume the lump? But shes in year 3 of a 5 year fixed rate so would this still reduce the interest? Sorry if I sound dense but we couldn't work out what's the best option

In my opinion, the lump sum would be better in that case as although interest is only usually applied on a monthly basis, it is often worked out on a daily basis (mortgage papers will confirm if calculated daily etc). If she is on a mortgage that calculates interest on a daily basis the sooner the overpayment is made the less interest is accruing.

It doesn't make a difference reference the fix rate, as it just means a higher proportion of the monthly payments covers the capital rather than the interest.

Another point reference the 10% overpayment allowance is that with some banks it is not a contractual right as such and can be removed, how would you feel if they decided not to allow that 10% any more.

Also overpayments can be useful if at the end of the fix term you can get to a lower loan to value bracket, as such you can also save there when it comes to re-fixing with same bank or remortgaging elsewhere.

Greenst

:beer: cheers thanks for that. Have just had chat and she's confirned daily interest in fact £4.11 added each day through the month at the moment so again I'd assume paying the lump sum would reduce that and as you say the repayments would immediately start paying off the capital. Also Shes still in a position to then put the current monthly overpayments into savings which get some interest then could put that towards another lump sum payment next year!! All sounds good then if I understand it all correctly ! Thanks for the help clarifying it all !

SAHD_Jim

Greenst wrote: »

:beer: cheers thanks for that. Have just had chat and she's confirned daily interest in fact £4.11 added each day through the month at the moment so again I'd assume paying the lump sum would reduce that and as you say the repayments would immediately start paying off the capital. Also Shes still in a position to then put the current monthly overpayments into savings which get some interest then could put that towards another lump sum payment next year!! All sounds good then if I understand it all correctly ! Thanks for the help clarifying it all !

yep, it will reduce the ongoing interest as soon as the lump sum is paid in and if she can start building next year's lump sum, then all the better :T

PixelPound

I always find it strange posts of whether its better to pay lump sums or monthly when there are tools like
https://www.drcalculator.com/mortgage/uk/
where you can plug all the numbers in yourself. You can put monthly overpayments in or lump sums, you can also play around with interest rates, such as "what if there's a 0.5% raise, how will fixing now at 2 year or 5 year work out - what if it was 1%", etc etc.

Greenst

Sorry to resurrect this but I thought it would be easier than starting all over again and apologies to collision for hijacking the thread again !
Just heard from my friend she paid the overpayment lump sum on the mortgage but now the mortgage company has reduced her monthly payments, which is now defeating the object a bit. They haven't reduced the monthly standard payment all the time she's paid her 10% monthly but now she's paid it as a lump sum they have! Is it just a matter of calling them and getting it put back to the original amount? Is this standard procedure? She wasn't asked if she wanted to reduce the payments or even the term which is currently 10 years.
Any advice most appreciated she's at work today and can't make calls or personal "stuff"

Mobeer

Mortgage company did this to me too the first time I overpaid; I think a lot of people prefer this. Next time around I phoned up and let them know what I wanted to happen (shorten term) and had no problems.

So give them a call.