Does interest rate effect the value of an overpaid lump sum?

Dalekanium

Forgive this query as I may be asking a stupid question.

I ended a fixed term mortgage with the Halifax a few months ago and am now on their SVR currently 3.74%.

I have a lump sum to overpay on it as I’m keen to finish paying it off as quickly as possible.

The mortgage advisor at the Halifax says I can now overpay as much as I want without penalty so my question is, does it matter what the interest rate of the mortgage is on the overpayment?

i.e. will an overpayment of say £10k made on a 3.74% mortgage still reduce the capital by 10k or am I better off waiting till I have remortgaged to a lower rate?

In a nutshell does the mortgage rate have any bearing on the effective value of the overpayment I make? I suspect it doesn’t, but I’d like a second opinion before I dump a load of cash into it as I’m a bit insecure about my comprehension of the mortgage system.

Thanks in advance for any clarity you can provide me.

AnotherJoe

Wow, were you hiding behind the bike sheds having a fag when they were doing maths at school?

You owe a certain amount. If you pay off £10k you now owe £10k less. So that's £10k less you'll pay interest on. £374 less each year. Until you remortgaged. If you remortgaged to say a 2% rate it would save you £200 each year after that.

Interest is not some magic impenetrable super force, it's just what you get charged on what you owe. So as you owe less, your interest payable will be less.
The higher the rate the more interest you pay so the better off you are paying off as soon as possible

Dalekanium

I'm not entirely sure you understand what I'm asking. Forgive me if I was unclear.

My question is about the nature of a single overpayment lump sum and the timing of it to gain maximum effect of the that cash. When the mortgage provider receives that £10k and there is no penalty involved, can I reasonably assume that I will get £10k's worth of reduction on my capital or is there any adjustment to that amount based on the interest rate of the mortgage?

Hence does it make any difference if I overpay before or after remortgaging?

[Deleted User]

The answer was given above. You're charged interest on what you owe. The smaller the balance, the less interest you will pay.

Interest rate only impacts the amount of interest you pay on your remaining. So the sooner you pay, and therefore reduce the balance, the better.

Dalekanium

Thanks zx81. I didn't get Joe's original reply so I was asking for clarification. Could you answer this?

When the mortgage provider receives that £10k and there is no penalty involved, can I reasonably assume that I will get £10k's worth of reduction on my capital or is there any adjustment to that amount based on the interest rate of the mortgage?

Thrugelmir

Dalekanium wrote: »

When the mortgage provider receives that £10k and there is no penalty involved, can I reasonably assume that I will get £10k's worth of reduction on my capital or is there any adjustment to that amount based on the interest rate of the mortgage?

From the day that your lender receives the overpayment and credits it to your mortgage account you'll be charged less interest. That's where the saving is.

scottishblondie

A £10k overpayment will result in a £10k reduction of the outstanding capital regardless of the interest rate or when you do it, if that is what you are asking. However, for the £10k to have the maximum impact on your mortgage debt, you should pay it ASAP to reduce the amount of interest that you will pay over the remaining term, as the other posters have said. In other words, as there is no penalty to do so pay it now, do not wait until you are remortgaging.

Dalekanium

Thanks ScottishBlondie! That's what I needed!