Overpayment penalties 4 October 2020 at 10:03AM edited 4 October 2020 at 10:04AM in Mortgage-free wannabe 6 replies 61 views

Beeboo23

I have a question about mortgage overpayments. 
Provided my sale completes without issue I’ll have a mortgage of £1013 per month. I can afford to comfortably overpay £500 per month. 

However there are penalties for overpaying. 
5% in year one 
4% in year two
3% in year three etc. 

The current interest rate is 2.7% (mortgage is fixed for 5 years). 

Would it make better sense to save the 500p/m and make a lump sum overpayment in year 4 when the penalty is 2%?

I arrived at this conclusion as 5% penalty on a £500 overpayment is costing £25 per month. 
However 2.7% interest on the £500 per month if I don’t overpay that amount is only costing £13.50 per month. 

Maths is no longer my forte so I may be missing something obvious. 
I’d appreciate if somebody could advise with this. 
Many thanks. 

tacpot12

Well, the obvious thing to do is to save the £500/month, and pay it off the mortgage at the end of the five years when there is no penalty. If you pay the money immediately you switch onto the Standard Variable Rate, and have researched your next deal and switch to that quickly you won't loose out much.

Currently you can get 1% interest from National Savings & Investments on their Direct Saver Account, so this will grow the money slightly.  I would tend to use an Instant Access account for your savings, rather than a regular Saver account, just in case you need to take a "payment holiday".

haras_n0sirrah

Do you not get a 10% overpayment allowance?

Beeboo23

haras_n0sirrah said:

Do you not get a 10% overpayment allowance?

Unfortunately not. I originally was buying a different house with TSB that gave a 10% allowance but that purchase fell through and the mortgage product was removed due to covid. 
Being self employed with one year of account sales my choice of product was quite limited but was able to get an offer with Halifax. However, no allowance given for overpayments. 

getmore4less

Which lender?
size of loan and full term?

Most have ERC free overpay option upto a limit.  the most common is 10%.

Your maths is way out.
The penalty is a 1 off payment of 5%,  £25 per £500.
The interest is 2.7%, on £500  that's  £1.23 per month

on a £500 payment if you wait a year that save £5 on the penalty but cost  £13.50 in interest but you can get at least 1% £5 in savings interest.
making an overpayment with the 5% penalty will take about 3 years to recover the fee against just saving it.
There are savings options that will make this even longer, some that pay more than the mortgage rate.

Beeboo23

Oh silly me! I read section 8 of the mortgage offer which detailed the overpayment penalties. If I’d scrolled down to the small print I would have read this:

Overpayments

You are able to make overpayments to this mortgage at any time subject to the early repayment charges detailed in the 'Early repayment' section of the mortgage illustration. Currently, as a concession, during the period when the early repayment charge applies, you can make overpayments up to 10% of the outstanding balance each calendar year (using the balance as at 1 January of the year in question or, in the year in which you take out your mortgage, the original balance) and the charge will be waived. This is a concession which can be changed or withdrawn.

I’ll leave this thread up in case it helps someone else that doesn’t read things properly but it seems for now I can overpay 10% without penalty!

Beeboo23

getmore4less said:

Which lender?
size of loan and full term?

Most have ERC free overpay option upto a limit.  the most common is 10%.

Your maths is way out.
The penalty is a 1 off payment of 5%,  £25 per £500.
The interest is 2.7%, on £500  that's  £1.23 per month

on a £500 payment if you wait a year that save £5 on the penalty but cost  £13.50 in interest but you can get at least 1% £5 in savings interest.
making an overpayment with the 5% penalty will take about 3 years to recover the fee against just saving it.
There are savings options that will make this even longer, some that pay more than the mortgage rate.

Halifax 
250k
30 years

I’ll be honest that last paragraph went over my head and as it turns out I’m able to make overpayments after all.
 However, in case it helps someone else are you saying it would make more sense to save the money and overpay when the penalties expire?