Mortgage Jargon

Aubull

Hi there,

We're in the process of switching our mortgage deal (nationwide) from BMR to a 5 year fixed and have been asked to write to Nationwide admin centre to ' Capitalise our mortgage overpayments' in order for them to reduce our term.

Can anyone explain in layman terms what this means?

We've been overpaying for the last 7 years at roughly double the standard monthly payment.

Many thanks

ZarZar1990

Hi Aubull,
Usually, the amount you over pay will sit as a reserve on your account, so you won't get charged interest on it, but equally it sits there incase you need to take the money back for whatever reason.
If you want to reduce your term, the quickest way is to write to your lender and ask them to remove this reserve- it means you won't be able to get your money back but it will reduce the overall capital you owe, and thus, the term.
Does that make sense?

trailingspouse

You can't actually get your money back - but if you were in financial difficulties you could ask the lender to use that reserve to cover your basic mortgage payments, which would give you a bit of breathing space.

So for example, your basic mortgage is £700 a month, and every month you overpay by £300, making a monthly outgoing of £1000. You do this for a couple of years (£300 x 12 x 2) and have built up a reserve of £7,200. Then all of a sudden you lose your job, and money is tight. You can ask the mortgage lender to use that reserve to pay your £700 a month basic mortgage payment until it runs out (in this case, after about 10 months). It means you lose the benefits of overpaying the mortgage - but you don't lose the house due to non-payment of the mortgage! The mortgage term is being reduced anyway (it sounds like you are doing something similar to us, and we get a statement from Nationwide every month showing how the term is reducing) - but this reserve amount is a sort of halfway house.

If you ask them to capitalise this amount, you're telling them to take it out of the reserve and actually pay it in to the mortgage account. That means there's nothing to fall back on if financially things take a turn for the worse. Which is basically the situation people are in that haven't been overpaying their mortgage. Whether you feel that the risks of not having the reserve outweigh the benefits of the new deal, only you can answer.

kingstreet

trailingspouse wrote: »

You can't actually get your money back

If the OP is on BMR, the mortgage is probably old enough to still have borrow-back, the right to redraw overpayments.

This was withdrawn for new/altered accounts on 4 March 2010.

Aubull

Thank-you for your comments. That has explained it nicely. I wish the chap at NW had mentioned this after explaining what we wanted to do. We only found out when we got home and tried to pick a new product on online. The phone bod wasn't much help either.

Luckily we're in the fortunate position of having a secure jobs, savings and an overpayment pot. Reducing the term to 5 years, for us, ties up the uncertainty of the rates increasing while we are happy with the paying the increased mortgage amount.