Overpayment question to clear my mortgage early

Artica

Thank you in advance for your responses. The more I am learning about mortgages the more I discover that I don't know a thing and that if I (and the public in general) had all the info from the start we would save a lot of money.

Sorry it it is a long post.

Anyway, I was lucky enough to be able to switch my mortgage which is 2 parts (one ended 1st Nov and the 2nd ending 1st Feb) before the rates went to high and managed to fix 2 very good rates (well at least in my view) for 10 years.

I have 21 years left my mortgage (the 2 parts are running alongside with only 3 months end term apart)

I am going to try to pay off the 2 parts of my mortgage during the 10 years fix term. 

First off I looked at overpaying a bit and then putting money into a saving account. My calculation were around a 3% interest saving account with easy access and concluded that in saving a lump sum every year + a monthly extra deposit I should be able to reach the outstanding sum on my mortgage in 10 years.

And then I connected with my mortgage provider who revealed something to me that I did not know. I thought that the 10% allowance was a fix number which depended on the outstanding amount on your mortgage and you could not pay more than this.

However lender said:

"When you make payments to your mortgage that are in addition to your monthly direct debit, there are 2 different ways these payments are classified and in turn, 2 different ways in which your mortgage is impacted. It all depends on the amount of the payment itself.

Anything you pay that is under 3x your contractual monthly payment (the amount you pay on your direct debit) is called an overpayment. These reduce your capital balance, but your monthly repayments will stay the same. This means that the impact of these types of payments, is that your mortgage term is reduced. So long as the individual payment itself is less than 3x your contracted monthly payment there is no limit to these amount of payments on your account.

Anything you pay that is over 3x your contractual monthly payment, is called a part redemption. These reduce your capital balance, and will also trigger your monthly repayments to be recalculated based on your lower balance over the term remaining on your mortgage. The lower payment will take effect the following month. You will usually have a yearly allowance of how much you can pay off your mortgage as part redemptions.

Overpayments up to three times the contractual amount will not reduce your annual allowance."

So could you please let me know if I have this right. Let's say that mortgage part one has £140000 left to pay and that my direct debit if £700

and my mortgage part 2 has £90000 outstanding and I pay £400

Does this mean that effectively I am allowed to pay every month an extra, lets say

£1750 in part one (contractual payment x2.5) and £1000 in part 2 (contractual payment x2.5) so effectively £2750 extra a month in my mortgage

??

Or does "3x your contractual monthly payment" includes you direct debit so effectively I could pay the monthly payment + £1650 (my monthly payment + my monthly payment x1.5)

And this would mean that it would not be liable for any fee even if I repay over 10% of my outstanding mortgage balance as I would stay under the 3x contractual monthly payment??

I know we can get rid of this mortgage in 10 years with hard work and a bit (or a lot) of luck, I am just trying to understand the best way to do this. 

Thank you.

penners324

That depends on what type of mortgage you have. 

Who's the mortgage with?

It's very likely that if you overpay busy more than the 10% per annum they will charge the ERC

tacpot12

The text in italics seems pretty clear that if you pay LESS than three times your contracted payments, you are not regarded as having made an early repayment so your 'allowance' of being able to repay 10% of the outstanding balance remains intact. 

This means that the best way to repay is to pay slightly less than 3 times your contracted payments (e.g. £2090 and £1190), as this will not result in early repayment charge, even though you are overpaying your mortgage by more than 10% - until you make a payment that is more than 3 times your contracted amounts, they won't look at it.

I guess the  risk is that you make a payment that IS more than 3 times your contracted amounts, and then they include earlier payments that were not more than 3 times when they calculate how much you have overpaid by. The lesson is to only overpay by just less than 3 times the contracted amounts - this means that your contracted amounts will not change over the lifetime of the mortgage, but the mortgage term will shorten considerably. 

Artica

thank you for your responses. Seeing that my ERC are so high (10 years fixed with Barclays so large lump sum all the way until the end of the term) I really need to make sure I understand the lenders term properly.