Overpaying lumpsum from NatWest mortgage

Badaboo22

Hi, I'm about to enter the last year of a NatWest mortgage fixed at 3.39%. In previous years I've divided my 10% overpayment allowance by 12 and overpaid this amount monthly. This coming year with some savings now earning less than 3.39% I thought that I would be better to pay the full 10% off as a lumpsum on the first day allowed. When speaking to a NatWest advisor I brought this up and he informed me that any overpayment exceeding £1000 would automatically reduce my monthly payment and not the term like previous overpayments have.

Is this a bad thing? Can somebody with more knowledge on this please explain it a bit better than the advisor did?

Thanks in advance for any replies.

Theguywhovapes

If it’s a repayment mortgage you should have the option to reduce the term and keep payments the same. Unless it’s interest only, then only the payments can be reduced.

Badaboo22

It is a repayment mortgage. The advisor said that if I was to reduce the term and not the monthly payments I would end up getting charged for going over the 10% allowance with further payments.

Theguywhovapes

If you were to continue to overpay after the lump sum, whether you reduce the monthly payments or term, then an ERC would still apply.

What’s been explained to you doesn’t sound right to me.

Badaboo22

If I paid the full 10% overpayment and then carried on overpaying I would fully expect to be charged the ERC but this wasn't what the advisor meant.
My standard monthly payment without overpayment is £552, the advisor said that if I was to pay my 10% overpayment straight away and then keep paying my standard payment of £552 I would be charged a ERC because part of that £552 would go to paying the capital and this would cause me to go over the 10%. He said this is why they automatically reduce the monthly payment, to avoid a ERC.

What are the downsides to doing what NatWest suggest and reducing my monthly payment rather than term?

Theguywhovapes

Hi badaboo22

If the mortgage is on repayment you are already paying off the capital so what the advisor is saying is rubbish. As you will know an overpayment is anything paid above the minimum contracted payment I.e the 552. This is what you have done previously in years before by the sounds of it, and because no recalculation took place it would naturally reduce the term cause you were paying off more than what was needed.

A term reduction option should be offered if your wanted it, because the contracted payment doesn’t change but term would be the less because the balance would be.

There’s no downside between reducing payments or term. Reducing term overall means you pay less interest but reducing the monthly payment means more disposable income.

I’m just confused that they told you this was the only option, considering on their website term reduction is a choice

Thrugelmir

Theguywhovapes wrote: »

If the mortgage is on repayment you are already paying off the capital so what the advisor is saying is rubbish. As you will know an overpayment is anything paid above the minimum contracted payment I.e the 552.

Not rubbish at all. The advice given was correct.

Thrugelmir

Badaboo22 wrote: »

What are the downsides to doing what NatWest suggest and reducing my monthly payment rather than term?

In reducing the term the lender is required to perform affordability checks etc. Build the savings up and reduce the mortgage balance again at the next earliest opportunity.

Badaboo22

Hmmmm, conflicting opinions. Now I am confused.
My overall aim is to completely clear the £56000 mortgage in the next 18 months, paying as little interest as possible.

Does anybody know how to work out the difference in interest between these 3 options over the next 12 months?

A- Overpay £5600 on day 1(reducing term) and then carry on paying the standard £552 per month for next 12 months.

B- Overpay £5600 on day 1(reducing monthly payment) and the carry on paying the standard reduced payment for next 12 months.

C- Overpay by £466 + the standard £552 payment per month for the next 12 months.

I have asked NatWest this question but they don't seem willing or able to answer it so I would be very grateful if anybody could help me. Thanks.

TrickyDicky101

Difference in interest between A and B will be very minimal and shouldn't influence your thinking. C will result in higher interest because your overpayments happen later.