Did I make a mistake overpaying my mortgage?

hungry_hippo

Hi,

I've got a Nationwide mortgage with just over 2 years left on the 5 year fixed term with a decent rate if of interest.  There's 22 years left on the whole term.  Due to rising interest rates, I decided a few weeks ago to overpay my mortgage by an extra £250 p.m. while the rate is still low (for the next 2 years), as I calculated that this should bring me below the 75% LTV threshold and hopefully mean a future switch gets me not as bad a deal as if I continued with my regular payments (which would leave me on around 81% LTV).  I haven't set the term to change as I read that this can be difficult to extend again later if I found affordability to be an issue, and I didn't want to reduce the term now only to find out I want to stop overpaying and go back to my current 22 yr term, say if the interest rate is more than double in 2 years and payments are much higher anyway.

I did it based on this advice: (Nationwide website)

https://www.nationwide.co.uk/mortgages/existing-mortgage-members/overpayment-reserve/

"An overpayment reserve is what you create when you overpay your mortgage. It’s mostly used to reduce the amount of interest you pay on your balance. You can also use it for other benefits, depending on your mortgage deal"

However, I've just come across this:

https://www.nationwide-intermediary.co.uk/products/rate-switch

"If your client has an overpayment reserve, please note this will not be included in their overall mortgage balance when calculating their Loan to Value (LTV) for rate switch applications."

I'm really surprised by what I've just read.  Does this mean I can't achieve what I want as Nationwide don't include overpayments on your morgage balance when you do a product switch?  That seems really unfair - surely any overpayment you make should be included in your balance, as that's the point of it!  I think they're saying they include it in your balance when doing interest calculations but not switching :$ 

Does anyone know more about this and would I be better cancelling the overpayment as it's not going to help me get a better package it appears?  The interest charges will be a bit less admittedly but over just 2 years I'm not sure it's worth it and I'd be happier if it was in my savings account

Thanks
Pete





  

dimbo61

If you don't have any other expensive debts ? 
Do you have an Emergency find in case you need to replace the Gas boiler or Car ?
Well done on overpaying and your logic of getting down to 75%LTV by the time the current deal ends is sound.
If Nationwide won't accept the overpayments and LTV your at in 2 years then you can search the whole market. Loyalty when paying a mortgage is a moot point.

jrawle

Edited to remove incorrect information, for the benefit of future readers finding this thread.

My interpretation of the page you linked is the opposite of yours! It says the overpayment reserve won't be included in the mortgage balance. The montage balance means the amount you still have to pay back, so the sentence means that the amount you have overpaid is not included in this total. If it was supposed to have the meaning you were thinking, the present wording would be an odd way to express it. Instead, it would say something like, "Overpayments maintained as an Overpayment Reserve should be included in the mortgage balance for LTV calculation purposes."

I have taken new Nationwide mortgage deals several times and have never seen the overpayment balance counted as part of the LTV, although admittedly I don't think it would ever have made a difference to which band I was in. There is actually not so much you can do with an overpayment reserve these days. Going back a decade or so, you could borrow back your overpayment reserve at any time, but that hasn't been possible for a long time. So I don't see why it should count as part of your outstanding borrowing.

If you switch lender, the overpayment reserve would be gone anyway, so it would be irrelevant.

In any case, overpayments are still worth it as the reduction in balance will likely mean a bigger saving that the lower LTV. However, due to the current rising rates, if you are on a low rate fixed deal, you can probably earn more in interest if you put the overpayments into a savings account, then make the overpayment as a lump sum when you fixed deal ends.

Incidentally, would you go through an intermediary when taking out a new deal with Nationwide? This may result in slightly higher interest rates, and it's dead easy to switch online. You can change the term as part of the process, tweaking it until you are happy with the monthly repayment. I appreciate you may have a relationship with a broker you wish to maintain, but if not, please don't be put off thinking switching on your own is too scary.

jrrowleyws

You can commit your overpayment reserve into the mortgage and so it influences your LTV. You can choose how much of the overpayment reserve you commit and don't have to use all of it. It's really easy to do, just contact Nationwide when you're near to renewal, there is a form to fill out and sign then email back. I did it on my last property. Only thing to note, once you have committed any overpayment reserve into the mortgage, you cannot use it to reduce monthly payments or take a payment holiday. 

jrawle

jrrowleyws said:

You can commit your overpayment reserve into the mortgage and so it influences your LTV. You can choose how much of the overpayment reserve you commit and don't have to use all of it. It's really easy to do, just contact Nationwide when you're near to renewal, there is a form to fill out and sign then email back. I did it on my last property. Only thing to note, once you have committed any overpayment reserve into the mortgage, you cannot use it to reduce monthly payments or take a payment holiday. 

I found a form for doing just that. Search for "Overpayment Reserve Removal Form".

This is for additional borrowing, though; I can't find a form for a simple rate switch.

It says, "...the Overpayment Reserve will be included in the Total Mortgage Balance", i.e. the exact opposite of the page linked by the OP! It answers the queston anyway, which is that it isn't a mistake to overpay as you can choose to give up the overpayment reserve and use it to improve the LTV.

Another explanation from Nationwide here:

https://www.nationwide.co.uk/mortgages/existing-mortgage-members/overpayment-reserve/

hungry_hippo

Thanks for the comments, I called Nationwide and spoke to two people from their switch teams - both said that the overpayment reserve is counted towards the LTV when switching.  So in other words, overpayments are capitalised to reduce the overall outstanding balance.  I wish the website was clearer on this though.  My mortgage deal isn't that great really, 2.2% as I had quite a high LTV though I didn't get charged a switch fee for the last switch, so it worked out a bit better than that as the 1.x% deals had fees.  But it's better than my savings account 1.54% easy access, so I'd currently save more through reducing the interest charges by 2.2% and overpaying, than putting the amount I was going to overpay in a 1.54% savings account.

That might change in future with interest rates going up all the time