Woolwich overpayment vs part redemption

kenyonc

demon99 wrote: »

I work for Woolwich. Any overpayment equal to or more than 3 x CMP is applied as a part redemption and forces the CMP to be recalculated and a Revised Payment Notice (RPN) to be generated. This will result in lower monthly payments.

Any overpayment less than 3 x CMP is applied as a prepayment and reduces the amount interest is paid on but not the amount CMP is calculated on. This will result in the Mortgage being paid off sooner as more of the capital is being repaid in the CMP.

Hi

Can you clarify whether part-redemptions are subject to early repayment charges?

We have a Woolwich mortgage but a recent inheritance means we are able to remortgage to a better rate, but in the meantime we made a lump sum overpayment that was just under 10% of our mortgage amount (the max we can overpay each year), which was originally credited as a 'part redemption' and reduced our monthly payments. I telephoned Woolwich and got it changed to an overpayment so our monthly payments stayed the same.

I then subsequently made a further lump sum overpayment of £10k as a test, which has been applied as a part redemption. This has reduced the outstanding balance, but no early repayment charges have been applied. Does this mean I can make further part-redemptions to reduce the balance further without incurring ercs?

Also what happens when we come to redeem the mortgage in a few weeks time - will we have to pay ERC on just the current outstanding balance, or on the part-redemption (and any others we now make) as well?

getmore4less

I think you will have a ERC to pay when they catch up with you.

Have you actually checked your mortgage move will save you money after the ERC.

kenyonc

Yes even with the ~£6000 ERC we have we will still save (we have sufficient funds to drop down to a better loan-to-value / interest rate and reduce the term by 5 years - overall it drops our monthly payments by around 50%).

getmore4less

How did you do the calculation?
many people get it wrong when they do it they forget key factors often the payback period, the amount owing or interest on savings sometimes all three.

kenyonc

Currently have 29 years remaining on the term, four more years fixed at 3.99% with 3% erc. Balance outstanding is approx £226k including the overpayments made so far. Our current dd is fixed at £1300 (making slight o/p every month).

Changing to a 2 yr fix at 1.44%, borrowing £195k over 25 years, payments around £770 per month. Using inheritance capital to cover the difference (i.e. ~£31k capital reduction + ~£7k erc+~£1k fees/conveyancing).

£8k erc/fees is equivalent to approx 15 months difference in the direct debit payments so that's when we would 'break even' compared to if we stuck with our current mortgage. Over the 2 year fixed period we would have saved approx £13k in d/d payments compared to our current mortgage (i.e. we'd be about £5k better off factoring in the cost of switching). Assuming we could remortgage to a similar rate at the end of the 2yr fixed deal we would have saved approx £26k in d/d payments (i.e. about £18k better off) by the end of what would have been our (originally 5yr) fixed deal...

... plus we have knocked 5 years off the term.

getmore4less

That method does not give very close numbers for the real savings as you are just looking at the change in DD and not accounting for the change in debts.

£226k @ 3.99@ paying £1300pm with £31k in the bank say 1.5% net

After 4 years £197500 owed £32900 savings( net £164600)
there will be the 10% overpayment to use this up £31k will be better to do it a year at a time with 10% outstanding overpayment

1.£223000->£219300 less £21k from savings (£31k ->£31500->£10500->£10660
2.£197400->£189500 less £10660 (the last of the savings)
3/4.£178840 £161250
this is around what you wold be left owing after using up the savings with no fees.

£226k - £31k + £7k+£1k is £203k @ 1.44% paying £1300 4 years £150800
same inputs, savings and monthly payment adding in the charges.
This gives a like for like and an amount owing after 4 years

you do save around £10400 over 4 years more accurate numbers and detailed overpayment timings will get a closer figure and assumes no retention deal fees and the same rate is available.

if you don't make the £1300 payment on the new deal but save at least at the 1.44% rate it will come out the same or better.

IN your case there are clear savings but others with different numbers accounting for the savings interest and reduction in debts could give very differing results.

classy69

Sorry to hijack, but I have a Woolwich mortgage and have a quick question about overpayments. I understand I can overpay up to 10% of capital before an ERC kicks in, is this 10% of the capital I originally borrowed, or 10% of the capital outstanding at the start of each new year?

classy69

Anyone....?

kenyonc

I was told (by Woolwich when I phoned them to actually work out how to make an overpayment) that it is 10% of the outstanding balance as of 1 Jan of that year (which was really annoying because my inheritance funds cleared on 4th Jan...)