Overpayment Question Please Help

DeafCassette

Hi all,

Just after a bit of advice on the following:

Mortgage of 180000 on property of 245000
One year into a Bank of Ireland mortgage via the Post Office 3 year fix at 1.99% which has fairly onerous overpayment terms:

I can overpay a maximum of 10% of the outstanding mortgage balance per year.
Overpayments cannot be used to reduce the term of the mortgage, and if I do overpay, my monthly repayments will be reduced in accordance with the overpayment.

I get the sense that this arrangement of not allowing overpayments to go towards repaying the capital, but only paying off the interest and reducing my monthly repayments is similar in effect to minimum repayment amounts on credit cards. i.e. if I go for the overpayments, it won't have any real effect on attempting to pay off the amount I owe in any meaningful way.

It seems therefore that I might be better saving the overpayments, and paying off the total amount saved over 3 years in one payment at the end of the fixed rate term.

But that is counterintuitive to my mind thinking that - well, if I pay 10% of my mortgage of per year, I will be reducing the amount I owe, surely I must be…?

I'm finding this difficult. I could overpay by just over £500 per month - or 10% in a lump sum yearly, but i'm just sitting on the overpayments because I don't know which is the best thing to do.. I've already missed a year when I should have done something.

Please comment or ask questions, your assistance in helping me see the best route forwards is much appreciated..


DC

getmore4less

Pay it as soon as you have it.

The reduction in payment does not make that much difference till you get nearer end of term.

You counter it by overpayment of the surplus between deals.

DeafCassette

Thanks for the reply. I think this makes sense, and I can also pay the difference between the new payments and the old payments into more overpayments, I'm just not quite sure how overpaying without reducing the term actually works.

Mortgage 180000 at 1.99% - monthly repayments c. 760.
Pay off 10% (18,000) - how much is the amount I owe reduced to? Do I then owe 180000 minus 18000 plus any interest accrued.. ? Its a little confusing for me.

SG27

When you make an overpayment it pays off the capital. Interest is then added monthly (calculated daily) on the remaining balance. So by overpaying you are reducing the capital and saving on interest. If your overpayments are reducing the term then just add the reduction onto your future overpayments as you have said. It is actually beneficial this way as you can cancel your overpayments at any time and pay the reduced monthly payment if you needed.


If you overpaid the 10% on 180k in the first year of a 25 year morrgage the following years repayments would drop to about £708.

Essentially reducing the term and reducing futire payments have the same effect. You will pay the mortgage off earlier both ways and you will save on interest both ways.

DeafCassette

This makes sense, many thanks. I should have chucked some in last year, but failing that, I might as well get started..

Appreciated