Overpayments - Reducing interest not capital?

Beebe

Hi there

I am in the throws of getting a mortgage and have had my mortgage offer come through in the post. There is a section about over payments and it states the following:

You can repay all or part of the loan at any time before the end of the term in accordance with the mortgage conditions. If you make an overpayment (as defined in the mortgage conditions) of, or a series of overpayments that amount to, less than £5,.000 unless we agree otherwise we will not apply this to reduce your loan balance but it will reduce the amount of interest you have to pay straight away. If we do agree to reduce your loan balance you may have to pay an early repayment charge (as detailed in Section 10 above) and an administration fee (as detailed in our Tariff) and we may change the amount of your monthly payment. If you make an overpayment, or a series of overpayments that amount to, £5,000 or more we will use this to reduce your loan balance and this will reduce the amount of interest you have to pay straight away, you may have to pay an early repayment charge and an administration fee.

So it sounds like if I overpay I will only be reducing the interest and not the capital which feels like I am giving them more money that I normally would with no real benefit to me? Especially as I plan to switch once the 2 years fixed is up.

Anyone who can help unjargon this and help me understand any benefit would be appreciated.

Details of my position:

Mortgage: 152,550
Rate: 4.34% (Self employed - high risk)
Target overpayment:£200 a month

Peelerfart

Hi Op,

Who is the lender?

Beebe

Peelerfart wrote: »

Hi Op,

Who is the lender?

Oops yea that might help sorry.

It's Kensington.

minimike2

When lenders do this the money is usually held on a "pre-payment" account. As stated, you will not be charged interest on the amount of money which you overpay by (a good thing). The money would get applied to the mortgage as a part redemption if you ask for it to, or if it goes over £5k, from the looks of what you have written.

Mr.Snowman

Thanks Beebe, This thread actually seems to ask and answer the questions I joined to ask.

When I look at my mortgage statement, my actual term of the mortgage doesn't seem to be going down, and i don't seem to see anything listing my overpayments with the West Bromwich mortgage company Ltd
I've been overpaying for about 8 years and continue to do this.

minimike2. That's useful to know,
I've ask them how much does this reduces my mortgage by and they don't seem to be able to give clear answer, because they said "I may wish to take a mortgage payment holiday in the future" in case of an emergency.

I am wondering if its better to pay either a LUMP some per year and as they say "MAKE A CAPITAL OVERPAYMENT" what ever that actually means or just continue to make monthly over payments? So I'm not sure where i can make an actual financial comparison of the two payment methods. I have specifically said to them i want to pay this mortgage of ASAP, to A) reduce my mortgage and save money in the long run.

Having been burnt by endowments, the pension debacle, PPI,health, seen people getting burnt with insurance companies, I might be that I'm a little paranoid about financial institutions.

[Deleted User]

The earlier you make overpayments, the more you will save in interest, and therefore pay it off earlier.

Don't worry. Your overpayments aren't being loaded into the back of the CEO's car.