Halifax mortgage overpayments - not reducing payment OR term

withaspritz

Hello and good morning MSE!

FIrst post, I have searched for similar answers before posting!

I have a halifax repayment mortgage, taken out in 2007 (pre-financial crash) for 40 years. It was only a cheap property - I was a first time buyer. Over the last 6 months or so I have been making overpayments of around £600 a month (the standard payment is only £440).

I watched the Martin Lewis show on ITV a few weeks ago about overpaying mortgages, and he said to ensure the term is being reduced rather than the payment, in order to maximise the interest saving power of the overpayments.

What I have noticed is that the term isn't being shortened, but niether is my monthly payment! The monthly interest is staying roughly the same at about 300 a month.

So I called Halifax who said that the shortening of a term would essentially be re-applying for a new mortgage - I'd have to go through affordability checks etc.

My question is: if I just keep overpaying ad infinitum, I will probably clear my mortgage in 10 years not the remaining 29 on the term. So the term will be shortened anyway... but is this the most efficient way of doing this in terms of interest savings? The monthly interest amount doesn't appear to be materially different in my current scenario whether I am overpaying or not.

I'm not sure why it's so important I ask for my overpayments to shorten the term anyway.

The only explanation I can think of is that "at some point" (like maybe annual statement time) Halifax will reduce my monthly payment to take account of my historic overpayments - in which case I could just increase my overpayment by the amount they reduce my regular payment by... so if they say the regular payment drops from 440 to 400, i just up my overpayment from 600 to 640... is that valid?

For reference I am on a fixed rate until April 2019, so I can only overpay 10% a year, but I fixed at a higher rate than the SVR currently on offer, so I'm not too bothered about re-fixing it at the end unless rates look like they might go up significantly. When my fixed rate ends, I think the 10% a year cap is lifted on overpayments too

Megadebtor

I don't agree with shortening the term either. In fact, I make sure my term is staying exactly the same as I originally agreed with my lender (was initially 27 years).
Life does not stay the same over a whole mortgage term and by keeping the term the same and having lower payments, I actually have more flexibility. And should I face redundancy one day for example, I would benefit much more from lower monthly payments then a lower loan amount that I then cannot afford to service. And I am not sure that if I asked the mortgage lender in the future to extend the term again, they would agree to do so especially with lending criteria becoming ever stricter.

As long as you overpay what you save after an overpayment or new rate fix (in my case currently £50 per month), the capital will go down in any case and when it's gone its gone no matter how long the remaining term.

In my particular case, I have just agreed a new fixed rate starting in April and 30 days before, I can overpay as much as I like but not redeem. But in my case redemption is many years off. As soon as a fix ends you can redeem a mortgage if you have the funds. So I think it is much better to keep the term as long as you can until you are certain you can pay it off at a particular date even if life throws you a curve ball.

Also the lenders I have had over the years didn't actually decrease the capital amount borrowed unless I overpaid by a certain amount and they automatically decreased the term instead. Currently, I have to overpay at least three times the monthly payment amount to reduce what I borrowed. I think lowering the term only makes sense when you can afford large overpayments (more than 10 percent) fairly regularly as it will keep the original repayment at the same level and then you can repay more (ten percent) on top of that thereby reducing the mortgage more quickly.

If the Halifax decreases your monthly payment and you add that to your overpayment make sure it does not take you over the ten percent threshold.

A_Frayed_Knot

Hello and I apologise in advance for the lengthy reply.

withaspritz wrote: »

Hello and good morning MSE!

FIrst post, I have searched for similar answers before posting!

I have a halifax repayment mortgage, taken out in 2007 (pre-financial crash) for 40 years. It was only a cheap property - I was a first time buyer. Over the last 6 months or so I have been making overpayments of around £600 a month (the standard payment is only £440).

That's £1040 you are now paying a month - can you afford this every month or just sometimes?
Another point to make is, if your mortgage has a sub account, which is interest free, then make sure your overpayments are coming off the mortgage balance and not the sub-account balance which is interest free.

I watched the Martin Lewis show on ITV a few weeks ago about overpaying mortgages, and he said to ensure the term is being reduced rather than the payment, in order to maximise the interest saving power of the overpayments.

Halifax will not reduce your term unless you specifically ask when you go to re-mortgage, its not in their interest to do so.

What I have noticed is that the term isn't being shortened, but niether is my monthly payment! The monthly interest is staying roughly the same at about 300 a month.

So I called Halifax who said that the shortening of a term would essentially be re-applying for a new mortgage - I'd have to go through affordability checks etc.

You might just have to wait until your ready to re-mortgage, but keep in mind that if re-mortgaging with Halifax then they let you 3 months early without penalty.

My question is: if I just keep overpaying ad infinitum, I will probably clear my mortgage in 10 years not the remaining 29 on the term. So the term will be shortened anyway... but is this the most efficient way of doing this in terms of interest savings? The monthly interest amount doesn't appear to be materially different in my current scenario whether I am overpaying or not.

Are you registered for internet banking with Halifax, if so, you should see your mortgage balance and every payment deducted and every month the amount of interest they add on.

I'm not sure why it's so important I ask for my overpayments to shorten the term anyway.

It does shorten it, but won't see the effect until you re-mortgage.

The only explanation I can think of is that "at some point" (like maybe annual statement time) Halifax will reduce my monthly payment to take account of my historic overpayments - in which case I could just increase my overpayment by the amount they reduce my regular payment by... so if they say the regular payment drops from 440 to 400, i just up my overpayment from 600 to 640... is that valid?

Yes, you could do that, (just don't go over your 10% allowance) but depends on what stage you are at with your mortgage. eg If you have a low mortgage then when you try to pay 10% in o/p's you can do that very quickly which then restricts you to no more o/p's until the 1st Jan of the following year.

For reference I am on a fixed rate until April 2019, so I can only overpay 10% a year, but I fixed at a higher rate than the SVR currently on offer, so I'm not too bothered about re-fixing it at the end unless rates look like they might go up significantly. When my fixed rate ends, I think the 10% a year cap is lifted on overpayments too

This last comment is exactly what I thought (how wrong can you be) at the time my fixed rate finished - I then went into a SVR and was lower than my 2 year fixed rate deal, so wasn't too bothered to get a new deal straight away.

What I didn't know was the new fixed rate deal would have halved my interest payments each month. :eek::eek::eek:


Hope this helps somehow and if you are inclined to see just how long your mortgage would take to pay off with different amounts being paid, then here is a linky . . .

http://www.whatsthecost.com/snowball.aspx

withaspritz

Wow, thank you for your replies, I'm just digesting them!

withaspritz

Yes indeed I can afford to keep up the overpayments. I checked my two sub accounts and both have interest applied, so I overpay split across both accounts (using standing order reference ending 00)

I am on Halifax online banking and can see the balance reducing in line with the overpayments.

What I am unsure of, is if the interest should be less than the amounts being applied because of the overpayments. It's like, im overpaying more than 100% of the monthly amount, but the interest charged each month is maybe a few pounds less than if I don't overpay. I suppose it's the balance outstanding of about 90k, and a few hundred each month isn't making much difference to the interest.

A_Frayed_Knot

What interest rate do you have? My guess would be around 4%

Did you try the linky calculator to see if figures match up with what you are charged.

If my guess is right then,

£90000 - 4% - £440 mortgage payment + £600 overpayment means you would be MF in
July 2026. Although there will always be changes each time your fixed rate ends.

A few £'s off your interest rate each month sounds about right, but will always change due to the number of days in the month.

ps by December 2019 - that £600 overpayment would take you over your 10% allowance, so you would need to be careful.

A_Frayed_Knot

And . . . .

Just to prove my point about changing to a fixed deal with a better interest rate -

4% - Pay £272.97 interest for Feb (28 days) change to

2.04% - Pay £130.22 interest for Feb (28 days) and be MF by Nov 2025 instead of July 2026, just by changing your interest rate (down) of course.

withaspritz

Good guess - the figures are:

4.49% fixed until April 2019.
29 years 9 months left
£ 89,235.54 as of today balance (I've not yet made my overpayment this month, just the standard payment on the first working day of Jan)

If I fix for 5 more years at a low APR in April 2019, should I shorten the term or keep it at the 28 ish years it will be? WIll that affect the interest savings on fixing and continuing to overpay (as per your example above)? If I keep the term the same, I don't have to go through the credit checks and so forth I think.

withaspritz

I suppose my overpayments will be of use if I do re-fix, because I will have a better LTV ratio

Looks like there is an interest saving being applied - historic figures:

May 2017 interest (no overpayment) - 351.95 (31 days)
July 2017 interest (no overpayment) - 351.01 (31 days)
Dec 2017 interest (with overpayment) - 342.41 (31 days)

so it is going down a few quid faster!

I can't believe without overpayment my interest was only dropping by 94 pence a month! shocking!

pawlala

May I ask how you overpay? I have Halifax mortgage and if I pay via online banking (preferred - that way I don't need to speak to any numpties from India) I get the same issue as yours:

withaspritz wrote: »

What I have noticed is that the term isn't being shortened, but niether is my monthly payment!

However, when I rang them to make an overpayment (last did in Sept) they offered me the choice to reduce the monthly payment or reduce the term (I've just listened back to the voice recording). I always choose the former and it always recalculates the monthly payment AND takes into account ALL the overpayments made via online banking since the last time I rang them. (Does that make sense?)

So... if I want my monthly payments reducing I just make sure I may an overpayment over the phone and it will happen. Otherwise 95% of my overpayments are made via online banking.

withaspritz

I overpay by standing order.

To be honest my understanding is the best way to do it is to shorten the term rather than reduce the monthly payments.

I didn't know you could opt for that over the phone though