Capital repayment vs overpayments

xyz123

Hi, would approve advise on this. This has been discussed few times but I want to be sure please .

Assuming no ERC, is there a difference between overpayments or capital repayment in terms of its affects on total money paid over the term.

Is one option recommended over other in terms of total money owed ?

Ta

AnotherJoe

Depends when the payments are made. The earlier a payment is made, the lower the interest you pay in total.

So if you paid off £10k as a lump sum( i guess that's what you mean by a capital repayment) that would save more money than overpaying £1k a month for 10 months.

However, over paying £1k a month for 10 months would save more money than putting aside £1k a month for 10 months until you had the £10k amd only then making a lump sum payment.

Though to complicate it, if you put the £1k a month aside in a savings account with an interest rate that was higher than the mortgage rate, and paid off the (say) £10300 as a lump sum after 10 months. that would save a little bit more

xyz123

Thanks for detailed reply but that's not what I meant no capital repayment.

Some mortgage lenders give a choice when you make any overpayment on that whether to take that off the capital owed or off the capital + interest. In both cases you save in long run (in case of capilal+interest, this reduces overall money owed so for following months more if the regular monthly payment goes towards capital being paid off last. What I don't know is if one is better than other in long run.

getmore4less

Not sure where you got that idea from

Perhaps you could point at an example of a lender that claims to apply any extra payments to capital+interest.

All extra payments should come of the capital.

No lender should be putting extra money aside to pay of future interest.

xyz123

getmore4less wrote: »

Not sure where you got that idea from

Perhaps you could point at an example of a lender that claims to apply any extra payments to capital+interest.

All extra payments should come of the capital.

No lender should be putting extra money aside to pay of future interest.

Thanks for your reply. I have may be made a mistake but. This is an extract from Coventry building society:

They say
Any additional payment greater than three times your monthly payment will be treated as a capital repayment.
Any additional payment less than three times your monthly payment will be treated as an overpayment.
A capital repayment will reduce the balance of your mortgage and this in turn will reduce the interest we charge. You then have the option to reduce your regular mortgage payments from the following month onwards, or you can reduce the term of your mortgage, which means you will pay off your mortgage in a shorter period of time.



where as with an overpayment we will credit any additional payment(s) to your mortgage immediately, which means you will be charged less interest overall. However, we will not treat this as a capital repayment unless you specifically ask us to and the terms and conditions of your mortgage allow it. Therefore your payments will not be recalculated.

getmore4less

you misunderstood

There is no difference in the effect, both reduce the capital owed as soon as you pay it.
Both reduce the interest because you owe less.

it is what you chose to do next that makes the difference reduce payment or term.

With the 1st case you have to decide to reduce payment or term.

With the second neither happens and your payment stays the same(in effect it includes a small overpayment).

AnotherJoe

Yep, as gm4l says, you've misunderstood.

This comes up abouta zillion times a day here.

Doesn't make any difference as long as you pay the same amount in total whichever way you do it E.g. If they reduce the monthly repayments you need to up your overpayment to compensate for that reduction.

xyz123

getmore4less wrote: »

you misunderstood

There is no difference in the effect, both reduce the capital owed as soon as you pay it.
Both reduce the interest because you owe less.

it is what you chose to do next that makes the difference reduce payment or term.

With the 1st case you have to decide to reduce payment or term.

With the second neither happens and your payment stays the same(in effect it includes a small overpayment).

Thanks you. What confuses me is that obviously in second case also the term reduces but it's not visible to the mortgage payer?

getmore4less

Forget the term that just sets the min payment.
Many lenders don't actually change the contractual term they just keep the payment the same then some other change(rate being a common one) resets the payment anyway.

What you pay determines when your mortgage gets paid off(the real term).