Overpayment does not reduce term

w00519772

I have been overpaying my mortgage for the last twelve months (an additional £1k per month). I have noticed that my monthly payments are going down. For example, in August last year I paid £1541 (541+1,000 over payment). This month I paid 1,490 (1k + 490).

I spoke to Post Office about this and I was informed that the over payment is not reducing my term. In order to reduce the term I have to pay an additional £60 fee with each over payment.

I do not understand what the consequences of this are. The overpayment still reduces my capital and the interest I pay. Is it still worth making the overpayment?

getmore4less

Term is determined by the payments you make.

If the contractual payment goes down increase the overpayment(avoiding any charges).

you will owe less and pay less interest untill you owe nothing.

deaston

The term is going down as by overpaying you'll ultimately pay off the mortgage early and therefore pay a lot less in interest.

Typhoon2000

Yes keep making overpayments, your mortgage will be paid off much sooner even though the 'term' may not change. If you stop making overpayment you will pay your new lower monthly payments and your mortgage will end on the expected date. Do have the option of increasing your overpayments every month buy the amount the monthly payments have gone down the previous month?

kazd

What they are doing is recalculating your payments when you make the overpayment so that your mortgage still finishes at the same time. However as others have said if you keep overpaying your mortgage will finish early.

I moved mortgages to a tracker in 2009 at a significantly lower rate than the fixed I was on. I kept the payments the same therefore overpaying every month. My mortgage is due to finish by my 65th birthday but because I have overpaid every month it will be finished hopefully in the next five years or so which will be 8 years earlier than planned.

w00519772

kazd wrote: »

What they are doing is recalculating your payments when you make the overpayment so that your mortgage still finishes at the same time.

I am trying to visualise what is going on here. Say I had a mortgage of £111000 at 3.25% over 25 years.

This webpage says the monthly repayment would be: 540.02 to begin with. Say I paid an extra 1,000 each month, then the same calculation is done on 110,000 meaning the monthly payment for month one is: £536.05.

Therefore in my mind the only negative is that I am paying interest on the difference between the 540.02 and 536.05, which I would not pay if the term was changed and I paid the full 540.02 (along with the additional £1000). Is that correct?

Therefore it is still worth overpaying rather than leaving the money in a current account earning around 3% (Santander).

getmore4less

Depends on on how much tax you pay on your savings.

student100

Check your lender, Nationwide for instance if you overpay by less than £500, they don't change any calculations. If you overpay by £500 or more, by default they will change the monthly payments and keep the term the same, but you can choose to reduce the term instead.

Martin recommends you not reduce the mortgage term if you can avoid it, because it is less flexible (you can't get it increased again should you need it).

http://blog.moneysavingexpert.com/2014/10/09/dont-shorten-your-mortgage-term-if-you-can-overpay/

chelseablue

We are overpaying £300 a month but the term stays the same (we're with Halifax)


I like the term as it is because if there's a month we cant overpay we can just make the usual payment