Nationwide mortgage - moving house - ERC and overpayments question

student100

I currently have a mortgage with Nationwide, about half way through a 5 year fixed term. We are moving house (the new mortgage will also be with Nationwide) and have calculated that as rates have dropped it will be cheaper to repay the current mortgage and take out a new fixed rate for the full amount, even taking into account the ERC, rather than porting the existing mortgage.

The terms for our current mortgage mean there is a 5% ERC, but there is an overpayment allowance of 10% of the original mortgage loan per year which is not subject to the ERC.

I have the original mortgage offer but it's got some very confusing wording about how the ERC applies if you pay off in full. Both my annual statement and a calculation I got from Nationwide online show the ERC amount if I were to redeem the mortgage today as 5% of the current balance. They don't seem to have taken into account of the overpayment allowance (I have used a little of it this year, but not much).

I queried this with them in an online message but the person answering the queries doesn't seem to understand.

Let's assume the original loan was £80000 and current balance is £65000. They have calculated the ERC as 5% of £65000 = £3250. But if they took into account the overpayment allowance I could overpay £8000 penalty-free. Which by my estimation would lead to the ERC being (65000-8000)*5% = £2850, a saving of £400.

I have some savings in the bank which we were going to put towards the new house anyway, so should I just make the maximum overpayment (£8000 in this example) now, then there is no doubt that the ERC by the time we move will be lower?

student100

Here's the confusing wording:

10.
(...)
Early repayment charges are payable on this loan for the first 60 months.
(...)
Please refer to the conditions below for the actual calculation method.

Basis of charge: 5% of the amount repaid

The early repayment charges shown are the maximum charges you could pay if you repay the loan, or transfer to another
product, or exceed your overpayment allowance as detailed in section 11

An early repayment charge is payable if you repay the mortgage or transfer to another product within the Benefit Period.

The early repayment charge will be calculated on the amount advanced (less any overpayments) if within the year of completion,
or if not, on the balance of the mortgage at the last calendar year end, less any overpayments made since the last year end.

11. What happens if you want to make overpayments?
An 'overpayment' is any payment in addition to the normal monthly payment as quoted in section 6 above and also in addition
to any arrears balance currently outstanding. Payments of capital included in your overpayments will reduce the amount on
which we charge interest from the day after payment.
If you make overpayments totalling more than 10.00% of the original loan advance amount* (the Overpayment Allowance),
during the early repayment charge period(s) shown in section 10, you will be charged an Early Repayment Charge. This will
be based on the percentage(s) shown in section 10 and calculated on the amount paid in excess of the Overpayment Allowance.
The 12 month Overpayment Allowance period will start on the first day of the month following completion. This will continue
to be reset every 12 months until the end of your benefit period as described in section 4.

The bit about "The early repayment charge will be calculated ... on the balance of the mortgage at the last calendar year end, less any overpayments made since the last year end" is confusing, since it conflicts with "5% of the amount repaid...The early repayment charges shown are the maximum charges you could pay if you repay the loan". And the figure Nationwide has quoted me is based on 5% of the current balance.

I guess when you look at it it doesn't say that they consider paying off the loan in full the same as an "overpayment" and therefore apply the overpayment allowance to full repayments. In which case I guess it can't hurt to make the maximum overpayment now and hope it reduces the ERC due by the time of completion.

Thrugelmir

Lenders can only quote on the basis of what the mortgage balance currently stands at. Not what it might be. The 5% will apply to the balance owed at redemption.