Confused about overpaying mortgage

got2dothisnow

Although I've always overpaid on my mortgage, I'm a bit confused about this now, since I took out a new one two years ago when I moved house. The term was 17 years (now 15 left) and it's a 10 year fixed so we have been overpaying with the intention of clearing it by the end of the 10 years (now 8 years away).

The confusion is this: I can only overpay by 10% of the start of year balance each year, so as the amount owing decreases, the amount I can overpay also decreases, therefore meaning I can't get as close to 0 as I would like. e.g. when balance reaches 50,000, I can only overpay 5,000, so it will slow down and lengthen the term that I have planned for. Please can someone explain this to me as I can't get my head around it?!

When I look at the mortgage calculator, I realise it can't be too accurate as I'm currently overpaying £550 per month, but as I get closer to the end, this won't be possible as it will exceed the 10% permitted. I don't think the calculator can take this into account, so I'm unclear how long this will add to the term and don't really know how to work it out. I would really like to be able to plan out exactly what I will owe each month and exactly when it will be cleared, but I can't figure out how to do this!

Also, there is an early repayment charge, but I think this only applies during the fixed period so am not too concerned about this. I will check it when I get chance.

Sorry if this is a really obvious answer, but I can't work it out and am really hoping someone can share their wisdom with me.

Thanks in advance 

Linton

I think the only way of working it out is with a spread sheet.  Have a row for each year and columns for:
(1) mortgage at start of year=mortgage at end of previous year
(2) annual interest = (1) *%rate
(3) standard annual repayment
(4) desired annual  overpayment
(5) actual annual overpayment=min((4),(1)*0.1)
(6) mortgage at end of year= (1)+(2)-(3)-(5)

Then when (6) goes to zero or negative the number of rows is the number of years to clear the mortgage.

It may not be completely accurate since the interest in £s will decrease over the year as you pay off the mortgage.   However it is probably good enough for a reasonable estimate.

To get a more accurate month by month overpayment schedule you would have to work it out on a month by month basis which would be rather more complicated.

Mr._H_2

As I understand it, what you are saying is that the £550 per month overpayment (so £6600 per year) is less than the 10% limit, but obviously at some point in the future it will be more than the limit and you need a way to account for this in your financial planning.

You can use a spreadsheet such as Excel to help with this; if you search “spreadsheet mortgage calculator” you can find many free templates and guides. However, I don’t know if any of the templates will be able to do exactly what you want, without some modification. I believe many allow you to enter an overpayment, and the simplest would be to manually look at the outstanding balance and adjust the overpayment to 10% whenever it hits that limit.

I think it would be remiss to not also ask this question: are you sure overpaying is the best idea? What is the interest rate on your mortgage?

silvercar

Compare the mortgage interest rate with the best savings rate you can get. If the latter is higher then it makes more sense to have a savings account than reduce the mortgage. 

That said, I imagine that your mortgage has a restriction that you can repay up to 10% a year with no penalty, but any more than that and you will be charged an early repayment charge on the remainder. So it is in your interest to calculate what 10% would be and keep within the limit

ElwoodBlues

You would need a spread sheet as described above. I created a similar one myself and I did it on a monthly basis, it wasn't significantly more complicated than doing year by year, just a lot more rows.

What you can't overpay beyond the 10% allowance you can always put into savings and then pay off a lump sum when the fix ends. And if you got a good fix 2 years ago, there's every chance you'll earn more in savings interest than the mortgage interest will cost you!

gih

When you use MSE's overpayment calculator (https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/) a graph and table appears on the right hand side showing what your balance will be after Year 1, Year 2, etc after making a certain fixed overpayment for a particular mortgage debt with a fixed interest rate.

What you could do is use the calculator a number of times, each time using a different mortgage debt (your balance at the start of a  "mortgage year"), and repayment amount (10% of that starting balance, divided by 12 to give monthly amount).

For example, enter your mortgage balance at the start of your current "mortgage year" as your mortgage debt (Balance1), and the value of the repayments you make (0.1*Balance1/12). Then use the calculator to see what your balance would be after one year (call that Balance2). 

Then use the calculator again, entering Balance2 as your mortgage debt, and the repayment amount as 0.1*Balance2/12, and again use the calculator to see what your balance would be after one year. Then just keep repeating this until your balance hits zero.

A bit fiddly, but should be accurate.

got2dothisnow

Thanks all! Lots for me to contemplate here.

I was considering the savings option now the interest rates are rising so I'll keep an eye out and switch to saving instead if I can find a good rate. I'm currently fixed at 1.99% so this would make sense.

I'm just a bit obsessed with watching my mortgage balance decrease and I'll miss that as it's so motivational. I also like throwing extra little payments at it whenever I can.

I should probably spend a bit of time researching savings accounts, shouldn't I?!

Mr._H_2

got2dothisnow said:

Thanks all! Lots for me to contemplate here.

I was considering the savings option now the interest rates are rising so I'll keep an eye out and switch to saving instead if I can find a good rate. I'm currently fixed at 1.99% so this would make sense.

I'm just a bit obsessed with watching my mortgage balance decrease and I'll miss that as it's so motivational. I also like throwing extra little payments at it whenever I can.

I should probably spend a bit of time researching savings accounts, shouldn't I?!

That's a great rate. If we ignore the £1000/£500/£0 tax-free interest allowances, to beat 1.99% you need a "normal" savings account paying:

>2.49% if you are a basic-rate tax-payer
>3.32% if you are a higher-rate tax-payer
>3.62% if you are an additional-rate tax-payer

Or, of course, a cash ISA paying >1.99%

This is all quite easy to achieve at the moment. If you're willing to jump through some hoops there's even the Barclays rainy-day saver paying 5%, or Club Lloyds Regular saver paying 5.25%. The latter is only for a year, but the money could then be rolled into a fixed-rate account; the market-leading 5-year fixes are currently paying 5%.

Coffeekup

got2dothisnow said:

Thanks all! Lots for me to contemplate here.

I was considering the savings option now the interest rates are rising so I'll keep an eye out and switch to saving instead if I can find a good rate. I'm currently fixed at 1.99% so this would make sense.

I'm just a bit obsessed with watching my mortgage balance decrease and I'll miss that as it's so motivational. I also like throwing extra little payments at it whenever I can.

I should probably spend a bit of time researching savings accounts, shouldn't I?!

As others have said creating a spreadsheet if you know how is good thing to do, there are plenty of free ones to use like libre office. If you don't know how plenty of learning vids on the you tubes. You can then create spread sheet for savings and other things like everyday spending. 

Like you I wanted to work out when the tipping point would be, where I couldn't pay more off the mortgage because of the 10% limit/ERC. I also wanted to know exactly how much I needed to have saved to pay off the mortgage once the fixed rate finished.
I created a spreadsheet, but after a few month's I was questioning myself how good it was, so I downloaded a amortization template and worked off that. As it happens both the sheets I have are accurate within a few pence each month. It's nice to see where the tipping point is, how much interest I've actually paid and actually how much I would have paid in the future, also setting myself targets to get to i.e. getting the interest under £5 a day or getting to month 62 where more comes off the mortgage principal than interest payments.

Overpaying can get addictive, but as others have said savings rates are starting to get better than your fixed mortgage rate, so don't limit yourself. 

As for your ERC you need to read your mortgage documents, you don't want to think or guess as any unforeseen charges will cancel out any overpayment's you've made over the year's.
My mortgage (10year fix) had ERC of 5% for the first 6 year's and 4% in year 7, 3% in year 8, and so on. 

JMA74

To get round the overpayment restrictions as the balance drops you can ask the lender to reduce the term so that your overpayment becomes the contractual payment. 

jimjames

got2dothisnow said:

The confusion is this: I can only overpay by 10% of the start of year balance each year, so as the amount owing decreases, the amount I can overpay also decreases, therefore meaning I can't get as close to 0 as I would like. e.g. when balance reaches 50,000, I can only overpay 5,000, so it will slow down and lengthen the term that I have planned for. Please can someone explain this to me as I can't get my head around it?!

If you haven't already then worth checking that it's definitely 10% of outstanding balance. Some lenders like Nationwide allow 10% of the original loan so in later years it means you can clear very quickly if you have the funds spare.