Overpaying but bank reduces monthly payments

James19791

I have a 2 year fixed rate mortgage due to finish 2020 with a balance of £65,000 with a property value of around £230,000. I have around £18,000 in savings and want to make regular overpayments.


I overpayed last year the max 10% allowed (around £7,200). However, my provider (HSBC) immediately reduced my monthly payments (from around £400 to £350) which I did not want. I want to overpay again a lump sum for this year, so I called HSBC to ask them not to reduce my monthly payments and was told that they would automatically recalculate and reduce the monthly payments and would not keep them as they are. I assume they re-calculate to keep the term the same (currently 18 years).



It seems to me that by HSBC doing this I am not really allowed to overpay by 10% as they state I am and defeats the point of overpaying.



I have looked online and can not find any discussion of this happening when discussing overpaying.


If anyone has any advice on this I would appreciate it

getmore4less

Has been covered here numerous times

If you keep the payment the same you are overpaying even more than the 10%

The alternative is they charge the ERC on those extra payments

Some lenders ignore these extra overpayments.

I have done at least one post that shows the cost, it's not a lot.

Nearlyold

As above and it doesn't defeat the object of overpaying, you'll be paying less interest than you otherwise would if you hadn't have made the overpayment.

The total interest you pay on a loan is a product of both the amount outstanding and the length of time you owe money. If they've reduced your payment from £400 to £350 your debt will higher during the year following by an average of £300, which at say 4% interest will cost you £12 extra in interest, but you will still have saved £288 in interest on the 10% overpayment of £7,200.

In any event when the fixed term expires in a years time you can presumably pay whatever you want anyway.

James19791

Thanks for replies

Not sure I entirely understand it still. At the start of the year HSBC give me an overpayment allowance which is 10% and which I pay to the penny. How then would I be paying more than 10% if I keep my monthly payments as they are?

When they recalculate and reduce my monthly payments, are they adjusting so that I won't overpay for the year? Or to keep my mortgage term the same? Is my term reducing? I thought that if you overpay you automatically reduce your term?

bpj

James19791 wrote: »

Thanks for replies

Not sure I entirely understand it still. At the start of the year HSBC give me an overpayment allowance which is 10% and which I pay to the penny. How then would I be paying more than 10% if I keep my monthly payments as they are?

Your monthly repayments cover both interest and capital repayment. If you make a lump sum payment you will owe and pay less interest, and therefore more would go to paying off the capital if you kept the same monthly payment.

getmore4less

You do not reduce your contractual term with overpayments.

Sone lenders allow a temporary reduction in term that keeps the payments the same some don't.

Thrugelmir

James19791 wrote: »

Not sure I entirely understand it still. At the start of the year HSBC give me an overpayment allowance which is 10% and which I pay to the penny. How then would I be paying more than 10% if I keep my monthly payments as they are?

In which case if you maintained your monthly payments at the same level. You would incur ERC on the overpayments subsequently made. As your standard monthly payments in the remainder of the year would result in you exceeding the annual allowance.