Mortgage Overpayments (mortgage term not recalculated)

palmtreebeach

I contacted my mortgage lender to tell them that I intended to start making overpayments and that I wanted these to reduce my mortgage term instead of reducing my standard monthly mortgage payment. They told me that any overpayments which are less than three times my normal mortgage payment would be automatically applied to the capital owed (i.e. reduce my mortage term instead of reducing my normal monthly payment?). However, they also said that the official term of my mortgage wouldn't be automatically recalculated every time I make an overpayment, and the most likely point at which they would next recalculate my mortgage term would be when my fixed term period ends (which is about 9yrs away). My understanding from what they said to me on the phone was that my overpayments would reduce the interest payable on my mortgage as soon as I make them, even though they won't be reviewing the official term of my mortgage every time they receive an overpayment.

Does this all sound correct to you? My impression is that my overpayments will do what I intended - reduce my interest and (eventually) the length of my mortgage term - but my mortgage lender did give some quite long-winded explanations of how it works and I'm concerned that I misunderstood the significance of them not recalculating my mortgage term until my fixed-term period ends.

[Deleted User]

Yes, that's all correct.

The benefit of not changing the term is that you still have flexibility. Just keep making your overpayments to reduce the balance. If you really feel the need to change the term, you can do that at the appropriate time.

Thrugelmir

Your mortgage term is contractual. In shortening the term the lender is duty bound to perform an affordability assessment. Likewise the lender doesn't want to incur administration costs every time an overpayment is made. Which could be a small amount of money. 

The simple answer is that by making overpayments you are naturally reducing the time it will take you to repay your mortgage. Reducing the capital owed results in a lower interest charge every month. Like rolling a snowball over time the benefits will grow in size. 

getmore4less

Is this Barclays?

The contractual term just sets a payment once that is set you can ignore it. 
What you pay determines the real cost and term of your mortgage


There are only 3 variable to a mortgage 
amount borrowed,
interest rate,
payment

Every payment reduces the capital then some interest gets added back on(often that is the same time as the regular payment so you just see the balance go down a bit less than the payment

every time the balance goes down the next amount of interest is lower(if the rate does not change).


if they are not changing the regular payment and not counting that payment as a part overpayment that exceeds ERC it makes no difference to the cost of the mortgage or the final actual term  your payments do that.

Even if they adjust the payment back to contractual term you just overpay it until you start hitting ERC, then you save it up and add it at ERC reset(usually one a year).


If it is Barclays you can have the payment reset by asking  if you need to get it a bit lower.

if on a 10y fix keep an eye on ditch the fix options as your LTV drops if not already low..

palmtreebeach

Thanks, everyone. The lender is The Coventry. There's no chance of me getting near ERCs - I think I can repay 10% of the whole mortgage each year until they kick in, and there's no chance of me doing that, unfortunately

After 5yrs the penalties of ditching my fixed rate seem to go down a lot. Good to have the option remortgage then, but I'll see what my circumstances are at the time.

getmore4less

That Coventry is probably there 5/10 rate, fixed for 10, ERC for 5, so a great choice against rate rises if they happen for a reasonable extra cost for 5 years.