Could anyone help me understand overpaying (Nationwide) mortgage?

B0bbyEwing

May be in a position to overpay a fair chunk. If so then I have some questions:

I thought overpaying was overpaying. Seemingly not. I wasn't aware there's ways to overpay.

Now my mortgage is a repayment mortgage if that helps matters.

I did a dummy run on the site to see what the options were:





So the idea behind overpaying for us is (as our 5yr fixed ends next year & we're on a 2.14% deal at the moment and not the 3.19% I thought we were on when I mentioned it in another thread (that was the original one 5yrs prior)) so that once this 5yr deal ends, our next fixed isn't going to be as high as it would've been without the overpayment. Also, would be nice if the overpayment helped reduce the term some, though I doubt it'd be significant enough & I suspect reducing term is different to bringing the next round of payments down.
I suspect using it to shorten the term will only increase the monthly payments, right?

I currently pay £391 & I'm happy for that to continue, even after the overpayment. I'd just want it to lead to the next 5yr fixed being less than it would've been prior to the overpayment.



So I'm not really sure which to pick, or which is best.

Currently 79k on the mortgage. 21 years.
So I chuck £10k at it. Now 69k on the mortgage.
I'd hope the monthly repayments are also reduced.


Never really looked at overpaying at all until literally today so not too sure the way forward.

For this example - assume the 10k for the overpayment. All figures correct.

dimbo61

Well you might be limited to 10% in any one year.
Check the T and C,s of your mortgage offer.

Lee667

I'm with nationwide, and you do need to specify what you want the overpayment to do. I imagine the 3rd option on the overpayment choices would keep the overpayment separate to one side for you to decide what to do with it in the future.

If you want potentially lower payments when you next fix then the 2nd option would be what you'd probably be looking for, as that will keep the mortgage term the same but lower your payments. 

But in doing so, you could potentially end up paying the same or more than what you're paying now depending on what the mortgages rate do.

I don't know how much the 10k would reduce your monthly payment down by, is there a calculator on the site to work it out? 

gih

By the sounds of it, you don't want the second option, which keeps term the same and reduces the amount you pay each month for the remainder of your current deal.

Options one and three will both keep your monthly payments the same (i.e. £391 for the remainder of your current deal).
Option one however will reduce your term (probably by 2-3 years from your figures), and option three will leave your term unchanged.  So when it comes to remortgaging next year, option one will lead to higher monthly payments than option three.

Personally I'd go for option three where the term remains the same, and keeps the payment on your next deal lower than option one. I think you can apply to change the term at any time (Nationwide used to charge a small fee for this, but I don't think they do anymore).

Before chucking £10k at it, check that doesn't lead to an Early Repayment Charge - the max you can repay in a year before ERC is usually 10% of the original loan amount.

B0bbyEwing

dimbo61 said:

Well you might be limited to 10% in any one year.

There's no might. 10% is a cert.

Lee667 said:

I'm with nationwide, and you do need to specify what you want the overpayment to do. I imagine the 3rd option on the overpayment choices would keep the overpayment separate to one side for you to decide what to do with it in the future.

Bit of a nuisance. 
I don't want to "decide what to do with it in the future", I want it to help me out now (or say next year but basically short term) ... otherwise it's kind of pointless.

Lee667 said:

But in doing so, you could potentially end up paying the same or more than what you're paying now depending on what the mortgages rate do.

I don't know how much the 10k would reduce your monthly payment down by, is there a calculator on the site to work it out? 

Yeah that's the thing, I don't want to pay more. Pointless overpaying to then just have it not benefit me really.

As for the calculator...

I put the mortgage at 79k. I assumed throwing 10k at it would then just reduce my 79k mortgage by 10k and take it to 69k so that instead of paying £391 per month on a 79k mortgage, I'd be paying £391 per month on a 69k mortgage and then in 12 months when my 5yr fix ends, I'd be remortgaging on 69k (well, maybe 67k or so in 12 months time but you get the point).

So the calculator spat out a result which said lower monthly payments.

But now I'm getting the impression that's not the case - and that throwing 10k at it doesn't reduce 79k to 69k while also keeping monthly payments at £391.

By the way, I based this assumption on a bank loan. Taking out X-amount, £6k, you agree a monthly pay back over a set period. Throw extra at it and you still pay those same monthly payments, just the loan will end up getting paid off after 3 years instead of the originally agreed 5 years because you've thrown extra money at it.

That was the basis of my thinking.

gih said:

 So when it comes to remortgaging next year, option one will lead to higher monthly payments than option three.

Ahh that's no good then. All this stems from the fact rates are going up so I was looking at ways to reduce the per-month payment. I assumed overpaying would do that but it's not sounding like it.

gih said:

1) Personally I'd go for option three where the term remains the same, and keeps the payment on your next deal lower than option one. I think you can apply to change the term at any time (Nationwide used to charge a small fee for this, but I don't think they do anymore).

2) Before chucking £10k at it, check that doesn't lead to an Early Repayment Charge - the max you can repay in a year before ERC is usually 10% of the original loan amount.

1) Really? Option 3 sounds to be like it sort of gets banked until I decide what I want to do.

OR is option 3 what I was talking about with the bank loan - it'll take the 79k to 69k, it'll leave the £391/month payments as they are and in 12 months time I'll be remortgaging on a 69k (or 67k-ish) mortgage instead of 77-79k as it would've been without a 10k overpayment??

2) Done that. Nationwide say I can overpay 10% of the original amount which in my case puts it at £10,200 so 10k still allows me an extra £200 to overpay with.
What they don't say however, is whether that's per calendar year or per deal year (or whatever it's called) - as my 5yr fixed started in September I believe. So is that 1st Sept - 31 Aug or 1Jan - 31Dec. So in theory you may be able to do 10k 31st Dec and 10k 1st Jan...depending.
I've left them a message to ask about that one.

gih

Pretty sure with option 3, what happens is your 10k goes into an "overpayment reserve", and then your daily interest is calculated on a balance of 69k, not 79k, so there is an immediate benefit.

However, when remortgaging, I think Nationwide possibly ignore what is in the overpayment reserve when calculating your LTV - so if the 10k is still in the reserve then Nationwide calculate your LTV as if your balance is 79k.  To get Nationwide to calculate your LTV using 69k, you might need to ask them to move it out of the reserve and properly deduct it (removing the option of you underpaying).  I remember having to do something like this 5 years ago.  Of course, it might not make a difference either way to what your LTV band is.

So it looks like to me, if you want your £391 payment to continue after your overpayment, you don't want option 2 (which will reduce your current payments).  So that leaves options 1 and 3, both of which leave your current payment the same.
Option 1 reduces your term, which will lead to higher payments on your future deal than option 3, which doesn't reduce your term.  So option 3 looks the best to me, but you need to tell Nationwide to empty your overpayment reserve a couple of months before you remortgage to ensure you get the best LTV and therefore rates.

BikingBud

B0bbyEwing said:

May be in a position to overpay a fair chunk. If so then I have some questions:

I thought overpaying was overpaying. Seemingly not. I wasn't aware there's ways to overpay.

Now my mortgage is a repayment mortgage if that helps matters.

I did a dummy run on the site to see what the options were:





So the idea behind overpaying for us is (as our 5yr fixed ends next year & we're on a 2.14% deal at the moment and not the 3.19% I thought we were on when I mentioned it in another thread (that was the original one 5yrs prior)) so that once this 5yr deal ends, our next fixed isn't going to be as high as it would've been without the overpayment. Also, would be nice if the overpayment helped reduce the term some, though I doubt it'd be significant enough & I suspect reducing term is different to bringing the next round of payments down.
I suspect using it to shorten the term will only increase the monthly payments, right?

I currently pay £391 & I'm happy for that to continue, even after the overpayment. I'd just want it to lead to the next 5yr fixed being less than it would've been prior to the overpayment.



So I'm not really sure which to pick, or which is best.

Currently 79k on the mortgage. 21 years.
So I chuck £10k at it. Now 69k on the mortgage.
I'd hope the monthly repayments are also reduced.


Never really looked at overpaying at all until literally today so not too sure the way forward.

For this example - assume the 10k for the overpayment. All figures correct.

Only you can decide, once you know all the potential costs and benefits and your risk position.

Why not try a calculator for your circumstances, you can play with the numbers and see what works best for you.

http://excelworks.co.uk/default.aspx?page=30100&alias=Download%20Excel%20Mortgage%20Calculator%20Spreadsheet

You can usually confirm the ERC terms on you mortgage statements, mortgage anniversary or calendar year.

Try and think about total amount repaid, it will be a function of term length and interest rate, if rates go up even if you owe less your payment may increase. You can also assess the impact of savings rates as well, is it better to save than overpay?

Also consider the loan amount outstanding and options you may have as fixed rate period come to an end, use current rate and possible worst case follow on rate.

ElwoodBlues

I'm in similar position, and I've effectively gone for option 3 (my lender doesn't offer the choice, but overpayments below £1000 at a time don't get my monthly repayment recalculated to compensate). My thinking is that if I keep the monthly repayment the same, and the term the same, that's effectively an overpayment within the normal monthly amount compared to if the monthly repayment were reduced to preserve the mortgage term. All else being equal, I'll still end up paying the mortgage off quicker, but it effectively allows me to over pay a little bit more above and beyond the 10% overpayment allowance.

The monthly repayment will be recalculated as soon as you make and product changes (like taking a new fix for example), and presumably if needed, I could ask the lender to recalculate the monthly repayment - reducing it to preserve the mortgage term.

So for me, that's the most flexible option. I'm sure the lender will be more comfortable with you overpaying and shortening your mortgage term, but they may give it more scrutiny if you later ask to extend it again to reduce the monthly repayments (even if it is only back up to the original duration).

B0bbyEwing

Hmm. I'm off work in a few weeks time. I'm thinking it's going to probably be better to have a face-to-face with someone at Nationwide and find out EXACTLY the effects of this as typically, this doesn't seem straught forward. 

Regards the earlier comment of it may be better to save than overpay.

Its something I've never figured out so to simplify it, am I correct in thinking you just put your money where the higher interest rate is? 

So if mortgage is 5% and savings are 5.5% then put money in to savings? 

With everything else considered, that sounds too easy/simple to be correct and I imagine there's a whole flow chart of contradictory "yes, but if....."?? 

dander

The thing with Option 2 is that you are still paying interest for 21 years, so although your payment per month will reduce, you are paying for longer. So if you are focussed on shorter-term cash flow this will achieve that objective.
Option 1 is for when you have longer-term goals - the focus is on being mortgage-free as soon as possible. That saves you interest by reducing how many years you pay interest for, so you really get to see the benefit in about 18 years!
Option 3 sounds a bit like an insurance policy - the money is there to cover you if you can't meet payments in future, or want a payment holiday. 

Will depend if you are planning to cut your losses on 2.14 and remortgage or keep your nice rate for a year and make decisions further down the line. Many people talking about over-paying are trying to do it to reduce LTV to a place where they'll get offered a better rate when they remortgage - that doesn't apply to you, so you can take your time to work out where that money is best spent. 

fewcloudy

B0bbyEwing said:

Hmm. I'm off work in a few weeks time. I'm thinking it's going to probably be better to have a face-to-face with someone at Nationwide and find out EXACTLY the effects of this as typically, this doesn't seem straught forward. 

Regards the earlier comment of it may be better to save than overpay.

Its something I've never figured out so to simplify it, am I correct in thinking you just put your money where the higher interest rate is? 

So if mortgage is 5% and savings are 5.5% then put money in to savings? 

With everything else considered, that sounds too easy/simple to be correct and I imagine there's a whole flow chart of contradictory "yes, but if....."?? 

No I think you are correct, and it is that simple really.
However some people (me) decided to overpay mortgage despite getting a slightly better (but still pitifully small) interest rate on a savings account over the last 10 years.
My reasoning being that it was better for me to reduce the amount I owed on my mortgage, full stop. Had I put the same money into savings I may have felt I HAD to use it at various times over the years. It would have been available basically. Ended up mortgage free many years ahead of schedule. Go for it and don't dither, as all of your Options are better than none.