Mortgage overpayment and early repayment fee

btcp

I have an early repayment charge on the overpayment that is more than 10%, but I accumulated some additional money and thought of using it to reduce my debt. Every overpayment calculator says that an overpayment is beneficial even though I have to pay an early repayment charge.

For example, I overpay 5k on a 140k 21y mortgage, which will save me around 2k in interest. Early repayment charge on 5k is 150 pounds, so I definitely win if I am saving 2k. Is there a catch, or it is that straightforward?

Even with possible inflation of say 3% a year, 150 pounds will not reach 2k even close.

ViolaLass

How much could you overpay with no charge?

Does the £150 charge mean that only £1500 would be over the 10%? If so, you could consider keeping that aside to overpay with next year.

Or add it to your savings, pension, shares etc.

btcp

5k is above 10%, I've already overpayed my 10% this year. Early repayment charge is 3%. It is a hypothetical amount, potentially it can be more or less. And I hope my salary will stay the same so I will be able to overpay my 10% next year.

I maxed out my 123 bank account, and I am not ready to step on the investment path. So why to keep extra 5k that will not earn me any interest if I can put them into something that saves me 2k in a long run?

sue1976

Our 10% overpayment allowance is 10% of our initial mortgage. So on your £140,000 it would allow £14,000 each year. Are you sure you’re not allowed to overpay by a greater amount?

btcp

Sorry if it wasn't clear, I am talking about the overpayment amount above the allowed 10%. I already paid my 10% this year. Just wondering if that make sense to pay more.

ViolaLass

If you overpay that £5k next year, it will save you a hair less than £2k in the long run - without the £150 fee. The calculation isn't as simple as 'amount saved in long run - fee charged'.

When will your current deal end?

btcp

So if it's not that simple, could you please explain what am I missing? I will have money to overpay next year. The question is whether it is a good idea to pay more and a fee on top.

My deal ends in more than a year.

Thanks!

jenni_fer

Surely the key here is what is the interest rate?
Ultimately you need to know if you will get more interest on the amount of money in a savings account between now and the date you remortgage, compared to the amount of interest you will save less the fee.

btcp

Thanks jenni_fer. Why do you suggest to take into account the amount of interest I save by the end of the deal rather than amount of interest I save by the end of my 20 year term? And what is the easiest way to calculate the amount of interest I save by the end of the deal, can I simply enter 1 y 6 months term in the calculator and get the amount?

jenni_fer

btcp wrote: »

Thanks jenni_fer. Why do you suggest to take into account the amount of interest I save by the end of the deal rather than amount of interest I save by the end of my 20 year term? And what is the easiest way to calculate the amount of interest I save by the end of the deal, can I simply enter 1 y 6 months term in the calculator and get the amount?

Because at the point you remortgage you can choose to borrow slightly less (the money plus interest you've put elsewhere)
Not sure on the calculator you are using so can't be sure but a simple excel spreadsheet will give you the answer. You are comparing what the balance on your mortgage will be if you pay the money off vs. if you don't and have it elsewhere.

btcp

Ha, I didn't think that I can choose to borrow less... Demonstrates me being mortgage illiterate thanks for a great idea.

How does it work in principle? I thought if I overpay, even at the end of my deal, I will be charged early redemption fee. Are you saying that I could borrow less, and then send a difference to my solicitor and they will use it as a part of my previous mortgage repayment?