Extra monthly payment or Lump sum payment? Does it make a difference in interest saved?

beezysoldier

Looking to overpay my new mortgage which starts next month.
I can overpay upto 10% a year max (Natwest). Does overpaying as a Extra monthly payment instead of overpaying a Lump sum payment once a year make a difference on the Total amount of interest you could save and the Potential mortgage reduction?

MovingForwards

Sooner a Lump-sum is paid, quicker the daily interest reduces.

K_S

beezysoldier said:

Looking to overpay my new mortgage which starts next month.
I can overpay upto 10% a year max (Natwest). Does overpaying as a Extra monthly payment instead of overpaying a Lump sum payment once a year make a difference on the Total amount of interest you could save and the Potential mortgage reduction?

@beezysoldier Depends on how soon/late you make the lump sum payment. If we're talking about a calender year, maximum interest savings will occur if you pay the 10% lumpsum on 1 Jan and that will trump paying the 10% over a 12 month period. But if you pay the 10% lumpsum on  31 Dec, then the monthly payments will save more interest.

EDIT: As per ACG's post below, the above is applicable for all lenders that charge interest on a daily basis. I've probably worked with a narrower breadth of lenders than ACG as I can't recall ever having come across a lender who calculates it annually or a mainstream lender that doesn't calculate it daily.

ACG

Most lenders charge interest daily (Natwest included) but some lenders still do it annually.

If you pay £10k off today, you stop paying interest on that £10k today. If you leave it until the 31st December, you are paying interest on that £10k until then. 

Lenders who charge interest annually could be different. They may work out your balance on the 31st  December for example, so you could keep the money in a savings account until the 30th December and then transfer it over. 

getmore4less

The basic rule is pay it as soon as you have it. 

dimbo61

Lots of posts on here about overpaying the mortgage and a separate board called Mortgage Free !
The cheapest debt ( Interest rate )you can normally get is a residential mortgage secured on a property.
However overpaying may not be the best use of your spare money each month.
I would build up a good emergency savings pot before overpaying for the first 6/9 months.

bermudianmark

Of course it makes a difference.  My mortgage is £134,000 If I overpay by £179 it reduces my monthly payments by £1, that might not sound a lot, but I have been "chipping" away at it this year and reduced it down by nearly £12 per month.  So the answer is every little helps!

MFWannabe

Overpaying certainly makes a difference 
we overpaid and after our first 5 year fix we dropped into a much better ltv band and our monthly payments dropped by a lot 

MFWannabe

Overpaying certainly makes a difference 
we overpaid and after our first 5 year fix we dropped into a much better ltv band and our monthly payments dropped by a lot 

getmore4less

The question was does it make a difference how you make the overpayments.
The answer is as soon as possible(most case).

 Interest over the year with  £1,200 extra on £100k 2% £450 pm
£1969 end of year
£1958 £100pm(-£11)
£1944 begining(-£25/-£14)

Paying up front more than doubles the saving if you spread it out over the year