Mortgage overpayment question

LWill

Yes indeed we can change the payment but it will be to the recalculated amount. The problem is this means we can pay off less of the mortgage over the next year of, as even if we immediately make an overpayment of 10% the monthly payment has been lowered. (I'm thinking that this would amount to more interest paid than the 2% ERC of the £1036.24 that we have overpaid by..? )

I'm annoyed at myself for getting in this situation but I do wish I would have been advised to set up a standing order to overpay rather than this ' flexible payment' that has meant we are unable to revert to our set payment amount if we change..

Thanks,

Will

getmore4less

LWill said:

Yes indeed we can change the payment but it will be to the recalculated amount. The problem is this means we can pay off less of the mortgage over the next year of, as even if we immediately make an overpayment of 10% the monthly payment has been lowered. (I'm thinking that this would amount to more interest paid than the 2% ERC of the £1036.24 that we have overpaid by..? )

I'm annoyed at myself for getting in this situation but I do wish I would have been advised to set up a standing order to overpay rather than this ' flexible payment' that has meant we are unable to revert to our set payment amount if we change..

Thanks,

Will

put up all the mortgage details and it can be worked, out often it is not as much as people think.

key info are payments,  full term, reset date, I have the end date for ERC. Sept 2022



eg. if that was £140k over 14years 

amount	rate	payment	owing
£140,000.00	1.69%	£936.38	£131,060.35

and you have hit 10% of that  in the first year, £14k get used up leaving £131k-£14k  £117k


second year with and without a payment reset over 13years for 1 more year

amount	rate	payment	owing	interest
£117,000.00	1.69%	£835.93	£108,883.49	£1,914.62

amount	rate	payment	owing	interest
£117,000.00	1.69%	£936.38	£107,668.68	£1,905.24

<£10  difference  and you will pay £20  on a £1k overpayment that attracts 2%ERC


that £1k any surplus can be carried over and paid off as soon as the reset happens and the 10% used up ASAP.

LWill

What I am slightly further confused with is that with our ERC terms as follows:


'liable to pay an Early Repayment Charge when you repay the whole or part of the loan, over and above your standard monthly payments, during the ERC period which ends on the 30th of September 2022.

The ERC is 1% of the amount repaid early (above any overpayment allowances) for each remaining year of the ERC period (the first year commencing on the date of Drawdown and subsequent years on the anniversary of the date of Drawdown) reducing on a daily basis. '


we are actually better off going over our overpayment limit if we can afford to, as the 1% ERC of what we have gone over the limit by is always going to be less than the 1.69% mortgage interest we are paying..

Have I got this correct? I understood the ERC as a penalty but this would mean in this case it isn't??

Thanks in advance for any confirmation / correction!

Will

getmore4less

That's not how it works.

LWill

Sorry, you couldn't explain why could you / what I have got wrong?

Mortgage is for £139,255 over 14 years, taken out in June 2017, with a fixed rate of 1.69% until 30th of September 2022. 

Monthly payments were set at £931.58 and we have been over paying at various times and are now left with an outstanding balance of £69,651.

Thanks!

Will

getmore4less

Now you have provides some information can do some working out.

£139.255 14 years  1.69% payment £931.58  

I get for the 5 years(close enough) even though the fix is 5y2months(25july 30sept)

amount	rate	payment	owing
£139,225.00	1.69%	£931.20	£93,234.06

£69,651

ERC 2%  till either July or Sept  not clear if that resets same date as the ERC free reset(might not matter)

new ERC free July   

will work with now 3y9m and reset is in 3m and 1y5months to go next reset 1y 3m


Amount outstanding now 3y 9m £69,651

using regular £1,500(£78,693)  £1,800 (£64,766)   average of  £1695(£69,640.69)


OK now we have the basics in place you are hitting your ERC  limit for this year with 3 months to go.

it would have been around £8k  which sort of fits in with £800pm overpayments so far


I am going to use 3 payments till reset as that is most likely and 10y 3m as the outstanding full term.

IF we run £1500 for 3 month

amount	rate	payment	owing	interest
£69,651.00	1.69%	£1,500.00	£65,439.35	£288.35

you say you have £1036.24 that will hit the ERC which looks  in the right ball park.
£669 ERC free  left and £228 interest I would say closer to £600-£700



if the mortgage resets now with 3m to go before reset and 10y 3m full term

amount	rate	payment	owing	interest
£69,651.00	1.69%	£617.13	£68,091.70	£292.08

Now the should I overpay and incur the ERC bit.

A very common mistake is the assumption that you save the interest rate for the years left  but that gets it wrong if you don't take account of the ERC  if it will change.


Many ERC drop  1% a year so waiting till the reset  saves 1%  but the saving from the mortgage paymment depends how long there is to go to reset.


For the next 3 month you will incur a charge of 2% but can reduce that to 0% or 1% by waiting 3 months you only save a bit of the 1.69%


Your rate is 1.69%  that is ~0.141%pm. so the more months the more you save 


For each £1k  you overpay and may incur a charge of 2% or 1% depending which year it is in.
using your reset date as the end of July and looking at each month you incur an ERC of either 2% or 1%

Most of the time you are not saving anything, table shows net saving by month.

	rate	1.69%
	ERC rate	2.00%	1.00%
month	ERC	£20.00	£10.00
0	August	-£3.10	£6.90
1	September	-£4.51	£5.49
2	October	-£5.92	£4.08
3	November	-£7.33	£2.68
4	December	-£8.73	£1.27
5	January	-£10.14	-£0.14
6	February	-£11.55	-£1.55
7	March	-£12.96	-£2.96
8	April	-£14.37	-£4.37
9	May	-£15.78	-£5.78
10	June	-£17.18	-£7.18
11	July	-£18.59	-£8.59

Just looking at the overpayments
if you overpay now you will pay 2%  as you can overpay at the reset and incur no fee or 1% fee you can't save anything by overpaying now as you are in month 9 of the cycle
 
if you can max out your ERC free as soon as it resets and overpay more you can save a bit by paying the 1% ERC but that saving  goes negative in January 2022



That just cover the regular case of ERC or not for a payment. 


Yours is slightly more complicated as you have this payment reset and if you keep your £1,500 you get £930 not counted. 



If we look at the next 3 months

your approx. £1k  will cost £20 and save  £4.22, net  -£15.78  and the extra interest by reducing the payment is £4 

not resetting costs ~£10 more than letting the 3x£1,500 go out,


If you can delay 1m  that will help a bit but the conclusion is the same for this period till reset.


I recon when the ERC resets you have another ~£6.5k erc free 

Not clear if you have a massive surplus ready to overpay but let say you can still manage the £1,800 total.


3 month reset time you have £300*3 + ~£1k not used  + with a new payment of  ~£600pm £1200pm going forward

that ~£6.5k gets used up in 4 months

That leaves a window(Nov/Dec) where you could save a bit by overpaying and taking the 1% hit
(that window may be a bit longer depending when the ERC changes if that is not lined up with the ERC free reset)


Now we have the what if we leave the £1,500pm in place for another year.

using a starting point of £65,500 which is around where you get to if you leave it at £1,500 for the 3 months

amount	rate	payment	owing	interest
£65,500.00	1.69%	£1,500.00	£48,475.48	£975.48

then there is the alternative that you did reset payment to £617 
(with the money saved you have enough to bring it to the same balance but does leave a  smaller ERC free left.

amount	rate	payment	owing	interest
£65,500.00	1.69%	£617.00	£59,153.94	£1,057.94

in both cases this is before any extra overpayments

if we run both with £1,800 for 4 months 

amount	rate	payment	owing
£65,500.00	1.69%	£1,800.00	£58,654.54

At this point


payment reset will have used it all up, next 8m would look like

amount	rate	payment	owing	interest
£58,600.00	1.69%	£617.00	£54,303.09	£639.09

rolling £1,500 will have used up ~£3,500k of the ERC free,  3/4 months left

you can go another lets say 4m then reset payment(might just be 3) for remaining term of 9y 4m

amount	rate	payment	owing	interest
£58,600.00	1.69%	£1,800.00	£51,715.59	£315.59

amount	rate	payment	owing	interest
£51,700.00	1.69%	£499.29	£49,990.46	£287.64

(£288+£316)  ~£600 against ~£640 




That's pretty close and is going to depend on the underlying details of when you hit limits and do the resets.
(not doing a full spreadsheet for that)


That assumes you can keep the £1,500 going and only £550pm counting as an overpayment over the regular ~£930. till you hit next years overpayment limits again.


I think you may be right that letting the £1,500 run into next  ERC free year will save a bit and enough to recover the 2% ERC on this years overpayment ~£1k


When you hit next years ERC limit probably not worth taking the 1% hit and just resetting.

---------------------------------------------------

I would check and try to get them to allow you to keep your regular £930pm as that would be the best option.

Often worth trying more than one person as they don't always get it right.

LWill

Thank you very much for your time and input here 'getmore4less' I feel more prepared when I speak to HSBC now.

Will