Could anyone help me understand overpaying (Nationwide) mortgage?

ElwoodBlues

They all reduce your mortgage interest/save you money over the course of the mortgage, but the biggest savings are to be had by paying it off earlier rather than reducing your ongoing monthly payments over the existing term.

Interest is calculated daily, on whatever the current balance is. If you can get a better rate in savings than your mortgage rate (which is actually quite possible right now) then your money is better off in savings. But unless it's a big amount of money, or the interest differential is large, you're probably only looking at a few pounds a year benefit.

Also check how your overpayment allowance works. Mine (with NatWest) allows me to overpay 10% of the balance in fixed 12 month period, with the balance being taken at the start of the 12 months. So if my balance is 100k on the 1st October (or whatever date the lender specifies) then I can over pay up to 10k in the following 12 months (up to 30th September the next year, and then the new overpayment allowance for the next year is worked out). NatWest email me an overpayment statement each year showing how much I can overpay.

I rushed through my full overpayment allowance at the end of last month, so now I have the next full years overpayment allowance available to me as well (albeit slightly less due to the decreasing balance)

You would need to check exactly how your lender calculates overpayment allowances.

jimjames

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.

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

I think you're overthinking it. We've got a Nationwide mortgage and have made overpayments over a number of years. Good thing with them is that the 10% overpayment is based on original amount not current balance - in later years that makes quite a difference.

Shortening the term due to overpayment will not increase monthly payments. The overpayment allows the term to reduce but with the same payment each month. Keeping the term the same will reduce your monthly payments as you've reduced the balance outstanding so essentially have paid some of those future payments already.

In terms of savings vs overpaying - yes it can be better. My mortgage rate is 1.24% so can easily be beaten by savings at the moment. If it was 5% vs 5.5% then it would be more marginal if it's worth.

B0bbyEwing

jimjames said:

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.

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

I think you're overthinking it. We've got a Nationwide mortgage and have made overpayments over a number of years. Good thing with them is that the 10% overpayment is based on original amount not current balance - in later years that makes quite a difference.

Shortening the term due to overpayment will not increase monthly payments. The overpayment allows the term to reduce but with the same payment each month. Keeping the term the same will reduce your monthly payments as you've reduced the balance outstanding so essentially have paid some of those future payments already.

In terms of savings vs overpaying - yes it can be better. My mortgage rate is 1.24% so can easily be beaten by savings at the moment. If it was 5% vs 5.5% then it would be more marginal if it's worth.

You say shortening the term due to overpayments won't increase the monthly payments. 

If I say OK the term is now 19 years instead of 21 then surely the amount owed is split over 19 instead of 21 (therefore a greater per month amount)? 

If not then how not? 

Or do THEY decide what your overpayment reduces it by (equivalent to the amount overpaid)? 

While I overthink a lot, I don't think I'm overthinking this. Just not fully understanding it. 

I generally prefer to have live chat conversations with these people but for this I just think there's too many questions and too much I don't full get in order to do that and as much as I hate faffing about organising face to face appointments and having to arrange it round work which is extremely difficult, I may have to do that. 

IvyFlood

I just transferred money from my current account to the mortgage - in the App! I plan to do this every month?

Am I missing something?!

fewcloudy

B0bbyEwing said:

If I say OK the term is now 19 years instead of 21 then surely the amount owed is split over 19 instead of 21 (therefore a greater per month amount)? 

If not then how not? 

Because (if I have understood you correctly) at the same time that you reduce the term from 21 to 19 years, you have made a 10k overpayment. Right? So it would be a lessor amount split over those 19 years.

BikingBud

B0bbyEwing said:

jimjames said:

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.

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

I think you're overthinking it. We've got a Nationwide mortgage and have made overpayments over a number of years. Good thing with them is that the 10% overpayment is based on original amount not current balance - in later years that makes quite a difference.

Shortening the term due to overpayment will not increase monthly payments. The overpayment allows the term to reduce but with the same payment each month. Keeping the term the same will reduce your monthly payments as you've reduced the balance outstanding so essentially have paid some of those future payments already.

In terms of savings vs overpaying - yes it can be better. My mortgage rate is 1.24% so can easily be beaten by savings at the moment. If it was 5% vs 5.5% then it would be more marginal if it's worth.

You say shortening the term due to overpayments won't increase the monthly payments. 

If I say OK the term is now 19 years instead of 21 then surely the amount owed is split over 19 instead of 21 (therefore a greater per month amount)? 

If not then how not? 

Or do THEY decide what your overpayment reduces it by (equivalent to the amount overpaid)? 

While I overthink a lot, I don't think I'm overthinking this. Just not fully understanding it. 

I generally prefer to have live chat conversations with these people but for this I just think there's too many questions and too much I don't full get in order to do that and as much as I hate faffing about organising face to face appointments and having to arrange it round work which is extremely difficult, I may have to do that. 

Try the calculator I linked, it will illustrate and enlighten. Start off with your current set up and tweak by adding single overpayments, annual overpayments and also monthly overpay to round up to the nearest £100/£50 depending on your headroom. You will immediately see the difference. The interest paid starts to drop rapidly and smiles come flooding back.

All other things being equal but Mortgage 1 over paying by 10% of starting balance, so it is decreasing, per calendar year saves you £261k and shortens your term by over 14 years!

If you reduce your payment rather than retain and reduce the term you "only" save £197k.


A very powerful tool.

B0bbyEwing

I don't think it's the idea that overpaying leads to paying off sooner that's the the confusing part. 

Its that in my OP, Nationwide say which of 3 ways would you like to overpay. 
My only prior experience to overpaying was with a bank loan. 

10k borrowed over say 5 years. Pay back at say 2k per year (roughly speaking - obviously payments are monthly).
One year you say I'm going to pay 6k extra. 

Just like that, your 5yr term becomes 3yrs instead automatically but your monthly payments aren't changed any.
If your monthly payments also reduced then maybe you'd be back at 5 yrs total, but they remain the same. 

And I expected the mortgage thing to be the exact same so was surprised when it wasn't. 

Also, the secure messaging service with nationwide say I can't have the face to face. Has to be over the phone. 

Which would be fine.... If they worked longer hours than me. Except they don't. I start work way before them and I get home after they finish and only get a 30min dinner which you can end up using in full just being on hold waiting to speak to your first human. 

julicorn

@B0bbyEwing What you're describing there is basically option 1. 

Imagine you have a £100k mortgage, with 10 years to run. Let's say it's 3% interest rate, so your monthly payments are £966. 

You decide to overpay the maximum you're allowed to overpay in a year, £10k. You now owe £90k, but depending on which option you choose, the following happens:

Option 1: You still pay the same mortgage payment every month (£966), but your remaining term gets shortened to about 8 years, 10 months. 

Option 2: Your term remains the same (10 years), but your monthly payments instantly get reduced to £869. 

Option 3: Your contractual term remains as 10 years, but they still take £966 from you every month, and give you the option to underpay at some point in the future. If you don't use that underpayment option and keep paying the same amount (and assuming your rate stays the same), it functionally works out the same as option 1.



For what it's worth, I believe we went for option 3 for the flexibility, but we're on a tracker rate, and they recalculate the monthly payment amount every time the rate changes anyway, which currently of course happens pretty regularly. So effectively option 3 is working out pretty similar to option 2 for us. 

gih

IvyFlood said:

I just transferred money from my current account to the mortgage - in the App! I plan to do this every month?

Am I missing something?!

These options are available if you login to the Nationwide Mortgage Manager to make your overpayments.

B0bbyEwing

julicorn said:

@B0bbyEwing What you're describing there is basically option 1. 

Imagine you have a £100k mortgage, with 10 years to run. Let's say it's 3% interest rate, so your monthly payments are £966. 

You decide to overpay the maximum you're allowed to overpay in a year, £10k. You now owe £90k, but depending on which option you choose, the following happens:

Option 1: You still pay the same mortgage payment every month (£966), but your remaining term gets shortened to about 8 years, 10 months. 

Option 2: Your term remains the same (10 years), but your monthly payments instantly get reduced to £869. 

Option 3: Your contractual term remains as 10 years, but they still take £966 from you every month, and give you the option to underpay at some point in the future. If you don't use that underpayment option and keep paying the same amount (and assuming your rate stays the same), it functionally works out the same as option 1.



For what it's worth, I believe we went for option 3 for the flexibility, but we're on a tracker rate, and they recalculate the monthly payment amount every time the rate changes anyway, which currently of course happens pretty regularly. So effectively option 3 is working out pretty similar to option 2 for us. 

Superb, thank you.

Others may have said what you said, but you said it in the most clear way (for me).

So off of what you say I'm looking at option 1.

The true question is whether that's the best thing for us long term (& I'm not enough of a number cruncher to know that or not). Just because that's the outcome I had in mind, from past experience does not guarantee it's the best option for me. 

What fun & games.