Impact of lump-sum overpayment on capital balance

EJJOHNSTON

We have recently remortgaged and started a 5-year fixed rate mortgage. Our current mortgage value is £131,390 and total outstanding mortgage term is 12 years. It is our intention to reduce the mortgage term and balance whenever possible and we have the ability to make overpayments of up to 10% of our mortgage balance each year, without any penalties or charges.

We currently have £10,000 to invest and contacted our bank to find out the impact on our mortgage if we were to use this as a lump-sum overpayment. We were advised that this would reduce the current balance to £121,390 (as expected) and the balance at the end of our 5-year fixed term period would be approximately £73,000. However, if we do not make this lump-sum overpayment the balance at the end of 5 years would be £79,000. We do not understand why the capital balance on our mortgage should only be £6,000 lower in 5 years' time, when we have made a £10,000 overpayment.

Can anyone please shed light on this?

SueP19

I would suggest you use this to check for yourselves, you can add a lump sum payment (or reduce the total borrowed to check those figures because they don't make sense at all..............the bank may be telling porkies :rotfl::rotfl:

http://www.whatsthecost.com/mortgage.aspx

EJJOHNSTON

Thank you, SueP19. This tool is helpful in understanding how the monthly payments would be split between interest and capital.

SueP19

Your welcome, it is a very valuable tool and I bet the bank was a little out

getmore4less

It will be because the payment will go down.

ask them if they can apply the overpayment and not change the normal payment.

deetapp

yep, ask them to reduce the term, not the monthly payments

EJJOHNSTON

Thank you also for this advice. As you suggested, I called them to discuss making the lump sum overpayment and also keeping monthly repayments the same and this makes a significant difference to the capital balance projection at the end of the 5 year period.

You have both helped me greatly in understanding why the figures weren't making sense, thank you!