Overpaying with Nationwide - or save elsewhere?

newbieFTB

I currently have a mortage with Nationwide, it's shared ownership and was originaly a £91,000 mortagage. Nationwide allow 10% overpayment each year, of the original amount - what I'm planning to overpay by is much less than this.

I recently took out a 10 year fix at a very good rate 2.29%, seeing what is happeneing to the mortgage market is scary and it seems that low rates in the 2's or 3's are a thing of the past and the 'norm' in the future could be the 5/6's we're seeing today.

My motivation for overpaying is so that in 10 years time I'll still be able to afford my mortgage repayments even at much higher rates. Nationwide offer 3 options for overpayments:

I plan to pay £100 extra a month for now (maybe increasing to £300 a year or so down the line but I'm basing my decision on the £100).

I can't work out if Option 1, Option 3 or save elsewhere would be better for my situation? Any thoughts welcome

 

DesertRose

I’m in the same boat. 

I’ve been overpaying £100 a month for my first 5 year mortgage (20 years). In 2021, when it came to an end, I had overpaid by £6500.
I asked if the new mortgage (£46,500) can be for £40,000 instead, given that I had £6500 already in the account as overpay. I was told no, what that money does is reduce the term, my LTV would be 19% and the interest 1.49, on my new mortgage, and that’s a result of my overpayment. 

I didn’t quite understand the whole thing, so I stopped the overpayments and put the money in savings instead, I thought those money aren’t doing anything. But then it was explained to me by another mortgage advisor that the overpayments reduce the amount the interest is applied to on a monthly basis. So I reinstated the overpayments. 

Like you, I could do with a not more clarification:)

grumiofoundation

Purely numerically 

If savings rate > mortgage interest rate then it is better to save.*

If mortgage interest < savings rate then it is better to overpay (assuming no ERC).


*This assumes you are disciplined enough not to spend the money. 

gih

Lots of discussion on this exact topic on this thread:
https://forums.moneysavingexpert.com/discussion/comment/79531535

Pretty sure with option 3, what happens is your overpayments go into an "overpayment reserve".
Advantages: (1) your daily interest is calculated on the reduced balance (taking the overpayment into account), so there is an immediate benefit. (2) you have the flexibility to "underpay" in the future.
Disadvantage: When it comes to remortgaging, as @DesertRose says, I think Nationwide ignore what is in the overpayment reserve when calculating your LTV, i.e. the overpayments you made are ignored.  However, you can ask Nationwide to move the overpayments out of the reserve and properly deduct it, to give you a better LTV when it comes to the end of your current deal.  Of course, it might not make a difference either way to what your LTV band is, you'll likely be in the 60% LTV by that stage anyway.

If you are considering savings as an alternative, @grumiofoundation is correct though, especially the footnote.

We are in a similar situation, similar amount with Nationwide and took the 10-year fix at 2.29% earlier this year. However, we're in the process of moving, and porting that 2.29% fix to new property, and borrowing more.  Any overpayments will be on the new borrowing, which will have higher interest rate than any savings account.