Mortgage overpayments

muswellblue

Hi, 

Would anybody be able to explain how overpayments work regarding interest. 

I know I can overpay 10% of the balance each year. I don’t understand when you overpay how much goes towards paying capital and how much towards interest? 

And does this reduce the amount of interest during the fixed period? 

Thanks for any advice. 

Edi81

Interest is calculated on the daily balance. The amount of interest you pay reduces straight away as you have a lower balance. 

Exodi

muswellblue said:

Hi, 

Would anybody be able to explain how overpayments work regarding interest. 

I know I can overpay 10% of the balance each year. I don’t understand when you overpay how much goes towards paying capital and how much towards interest? 

And does this reduce the amount of interest during the fixed period? 

Thanks for any advice. 

Overpayments come directly off the principal (capital).

You pay interest on what you owe - if you owe less then you will pay less interest.

Think of it like this; if you owe the, £100k, you're paying them interest on £100k.

If you owed £100k but decided to pay them back £10k soon after, they would only charge you interest on 90k.

The interested is generally accrued daily and your monthly payment will swallow the current outstanding interest, and then go towards the principal.

jimjames

muswellblue said:

I know I can overpay 10% of the balance each year. I don’t understand when you overpay how much goes towards paying capital and how much towards interest? 

As above it all comes off capital. Even in fixed rate that will reduce interest paid. Also check with your lender, some allow 10% of the original mortgage amount not 10% of the current balance which can make a big difference in later years of the mortgage.