Overpayments on Barclays mortgage

id311299

Hi all, first post in this forum, apologies if it is TL;DR.

I have a Barclays 5 year fix mortgage that has some 1.5 years remaining until the end of the fix. Mortgage contract says that overpayments are allowed up to 10% per year.

Apparently Barclays mortgages, or at least the one I have, allow for two different types of overpayments:

1. Part redemptions - these reduce the contractual monthly payments.

2. Overpayments that go to the so-called 'Pre-payment balance'. These are limited to three times the contractual monthly payment and don't reduce the contractual monthly payments, but still reduce the amount of interest being paid, as daily interest is calculated on the amount of the outstanding principal balance minus the pre-payment balance.

The mortgage contract doesn't explicitly distinguish between these two; however, it appears that Early Repayment Charge only applies to part redemptions (first type). I have had multiple conversations with Barclays agents, and regardless of how I formulate my query, the answer is always the same - small overpayments (second type) that do not count as part redemptions never attract ERC, even if their cumulative amount goes above the 10% yearly allowance. This almost sounds too good to be true, as it effectively allows the borrower to accumulate as much as they want in the pre-payment balance, reducing the effective balance on which interest is paid to zero, with no penalty whatsoever.

Here is a possible scenario:

Outstanding balance £210,000 (for example) with £1100 monthly payment

Let's say that I have £210,000 sloshing in my savings account

I can make 70 individual small "type 1" overpayments of £3000 each, which will result in me having £210,000 in the "pre-payment balance", reducing the amount I pay interest on to zero. According to what the Barclays agents have told me, this is allowed, and will result in no ERC, and I will pay no interest whatsoever.

I am struggling to believe that the above scenario will be actually allowed with no penalties, as the bank will earn nothing in interest, and from the bank's point of view will be the same as me paying off the mortgage early and bypassing the control that is meant to prevent that (the ERC).

Does anyone have any experience with such a scenario with Barclays? Any view or comment would be much appreciated. Thank you in advance!

Marky4040

id311299 said:

Does anyone have any experience with such a scenario with Barclays? Any view or comment would be much appreciated. Thank you in advance!

What you've been told is correct however your example fails to take into account how long it would take you to make 70 small payments, Barclays bean counters aren't stupid, dont you worry.

You cannot pay 70 payments in one day or two days or three days they would count as the larger payment triggering the ERC. Even if you spent 70 days making these single payments your balance would attract interest DAILY so you would not never pay 0% interest on your balance lol. 

It is funny when people think they've found a way to beat the bank, you will NEVER beat the bank.

id311299

Marky4040 said:

It is funny when people think they've found a way to beat the bank, you will NEVER beat the bank.

Hi Marky 4040, it is not about beating the bank, it is about taking advantage of every possible loophole. It doesn't need to be full redemption, and it doesn't need to be perfect. For example, currently I have access to another credit line that is cheaper than the current mortgage interest rate, and being able to overpay more will leave me at an advantage. 

Marky4040 said:

 Even if you spent 70 days making these single payments your balance would attract interest DAILY so you would not never pay 0% interest on your balance lol. 

The daily interest amounts to around £1000 for 60 days, so not a significant factor methinks - one additional transaction?

Marky4040 said:

You cannot pay 70 payments in one day or two days or three days they would count as the larger payment triggering the ERC. 

I have done one-a-day series of transactions before, and they were all counted as individual small transactions, although cumulatively they were significant. Having said that, I have never crossed the 10% threshold so far. Being able to overpay by another 5-10% each year without paying ERC is a significant factor in my journey to being mortgage free.

dimbo61

Have you looked at Barclays offset mortgages 

id311299

dimbo61 said:

Have you looked at Barclays offset mortgages 

I am seriously considering one after the current fix expires! 

getmore4less

IT has been confirmed by others on here that option 2 has worked for them.

I suspect some of those may have only been doing 1 extra payment a month



Offset rates and fees are not as good these days

MasterplanC

I was wondering whether you tried your overpayment strategy with them and what the outcome was? We just had our mortgage offer with Barclays approved and that would be great to know.
Thank you!

id311299

Hello @MasterplanC

No, I didn't, but my observation is that making small (less than 3x monthly DD) overpayments do not reduce your current 10% part redemption allowance. I have had multiple online chats with Barclays agents, and have explicitly asked the question 'If I have lots of money in my bank account, what is stopping me from paying off my mortgage in around 100 small transactions and pay no ERC' - the answer was "Nothing, this is how the system works."

As others have said, if you don't take the mickey, and do one such overpayment per month, preferably as an increased DD, on top of maxing out your 10% part redemption allowance, the chances are that you will be okay.

MasterplanC

Great, thanks a lot for sharing that insight!

planetmatt

I am on a 10 year fix with just over 2 years remaining.

According to my offer, I'm allowed to make overpayments totalling 5% of the loan value (150,000) per year which is £7500 and each payment must not exceed 3 x my monthly contractual payment amount (about £2500).

Back in 2020, I over paid around £12,000 over the span of a week putting through 1 x £2000 payment per day for 6 days. (did not make payments at weekends in case they all rolled onto the Monday as one transaction)

I did not incur any penalty.

Before I did this, I called Barclays and the operator I spoke with said the ONLY restriction was the don't exceed 3 x contractual payment thing.  They told me there was no % limit.  

Jump to this year and I need to put through another large overpayment amount of just under £30,000.    I called Barclays again and this time they tell me I'm limited to the £7500 and because I've already over paid about £3000 this year, I can only over pay £4500 this year before being charged a penalty.  They tell me that this penalty is 3% of the payment value over the £7500 although I 'm not certain about this as I spoke to the "I cant pay my mortgage team", not the normal mortgage team because after spending 2 hours on hold I gave up and even this call got disconnected as I was trying to clarify.  

So now I'm confused.  Did I get lucky in 2020?  Was there some COVID exclusion in place to waive any mortgage penalties?  

I've run the numbers, and even if I incur a 3% penalty on the over payment amount above the £7500 a year, it will still work out cheaper than waiting and dropping the lump sum in 3 years once I'm out of the fixed contract period where any over payment is permitted.  

Can anyone talk about the over payment penalty?  Is it definitely 3% of the over payment amount?  It's so hard to talk to anyone and everyone seems to give different advice.  This penalty is not outlined in any of my paperwork.  

I have an appointment with an in branch mortgage advisor in 2 weeks so hopefully they can clarify.  However, I'm now worried that if I point out I never incurred a penalty in 2020, that will now get flagged and I'll get charged now. 

id311299

planetmatt said:

What I know for sure is that overpayments below 3x contractual monthly payments go to a special pre-payment balance, so they technically don't count as 'overpayments'. You can even get the money sat in this pre-payment balance back in the sense that they allow you to reduce your monthly payments, so you can effectively pay your monthly installments with that money. I think Barclays as a general rule only apply ERC to part redemptions, i.e. money that go straight to reducing the principal. Pre-payment balance doesn't count.

I would advise to talk to someone through the online chat and ask them to tell you how much money you have in the pre-payment balance, what can you do with that money, and explain in what circumstances ERC is applicable to using funds in your pre-payment balance. This also gives you a written record to keep and show in the future.