10% yearly limit to early payoff, but 10% of what?

westernpromise

I’m aware I need to check the actual terms but I’d need to dig these out and just wanted a general idea of the answer to this. I have a fixed mortgage that allows me to repay 10% of the balance per year; any more than that and it’s a penalty.

Does this clause usually mean that you can repay 10% including whatever you’d repay via the normal monthly payments, or that you can repay a further 10% on top?

For example, if you had a £100k mortgage at 3% with 15 years left, then in the next year you’d repay £8,300 of which £5,600 would be principal. Are you usually allowed to pay off another £10k upfront, or is it usually a total of £10,000 for the year, i.e. another £4,400 on top of the £5,600 to make £10,000?

kingstreet

An extra 10% of the outstanding balance, or in the odd case an extra 10% of the original loan.

frazell

You should definitely check with your mortgage provider but usually it is 10% per annum from the balance. So in the case of a £100,000 outstanding that would be £10,000 allowable overpayments in a year. This would be on top of your usual monthly payments.

Providers would usually allow both ad hoc payments per month or a single lump sum payment per year, its purely up to you. It is worth stating that as the interest is calculated daily (in most instances), the sooner you overpay the bigger the effect of reducing the balance.

You can usually stipulate if you want the overpayments to be applied to the capital or the interest and if you want to reduce the term or reduce the monthly payments.

You'd have to have a screw loose to want to pay off the interest before the capital and I think the consensus is that you should apply to reduce the monthly payments rather than reduce the term.

lee111s

frazell wrote: »

You should definitely check with your mortgage provider but usually it is 10% per annum from the balance. So in the case of a £100,000 outstanding that would be £10,000 allowable overpayments in a year. This would be on top of your usual monthly payments.

Providers would usually allow both ad hoc payments per month or a single lump sum payment per year, its purely up to you. It is worth stating that as the interest is calculated daily (in most instances), the sooner you overpay the bigger the effect of reducing the balance.

You can usually stipulate if you want the overpayments to be applied to the capital or the interest and if you want to reduce the term or reduce the monthly payments.


You'd have to have a screw loose to want to pay off the interest before the capital and I think the consensus is that you should apply to reduce the monthly payments rather than reduce the term.

Why would you want to reduce the payments rather than the term? Defeats the object does it not?

frazell

http://www.moneysavingexpert.com/news/mortgages/2015/03/decrease-the-term-or-overpay-my-mortgage-martin-lewis-answers

The overall effect is the same in the end, give or take. By reducing the monthly payment you build in some flexibility should you not be able to overpay anymore.

What I do is adjust the overpayment each month by the difference so you are paying off more (fractionally) each month.

Since I started overpaying I've reduced my monthly mortgage payments from £1780 to £1725 in just a year. It doesn't sound a lot but it just makes my mortgage just a little bit more affordable should I be out of work etc, etc.

Thrugelmir

frazell wrote: »

You can usually stipulate if you want the overpayments to be applied to the capital or the interest

How do overpayments reduce the interest and never always the capital?

Reducing the capital balance owed has the effect of reducing the amount of interest payable.

westernpromise

Thanks all. The mortgage is a 10-year fix which has just entered its 3rd year. I am putting together a financial plan for my other half if anything happens to me. There will be insurance and other payouts suffiicient to clear the mortgage. One of the considerations is whether it makes sense to do so. Rather than pay off the mortgage right away (triggering a 6% early redemption charge), it might make more sense to put aside a sum sufficient to clear it over the eight remaining years of the fix.

That is, a sum gets put on deposit, earns a bit each year and is drawn down by a 10% overpayment at the start of the year and by the sum needed to make the monthly payments. They cancel each other, roughly, so she'd get to avoid the 6% hit.

It depends a lot on whether it's possible to earn, net, the mortgage rate, after tax.

frazell

Thrugelmir wrote: »

How do overpayments reduce the interest and never always the capital?

Reducing the capital balance owed has the effect of reducing the amount of interest payable.

That's why I said that you'd have to have a screw loose to make overpayments on the interest portion of the loan, but it is an option that lenders give you. When I set up my overpayments with Santander they asked where I wanted the payments applied, interest or capital. Errrrrrr, capital please.

As you rightly say, applying the overpayment to the capital reduces the loan which takes big chunks out of the overall interest owed.

I should probably add that this might be a hangover from when interest only mortgages were more common and you could apply overpayments if you wished. Why anyone would is a whole different subject......