Mortgage recalculated part way through fixed term

housebuyer143

400ixl said:

penners324 said:

You're over reacting.

Just increase your overpayment by the amount the original repayment has dropped

Not always that simple, as the monthly rate drops, the value of the % overpayment allowed also drops. This means you can reach a point where you can't overpay as much due to breaching the limit.

If you could over pay by 10% (common limit) and you were paying £500 you could over pay £50 a month. If they drop the monthly payment to £400 then you can only overpay £40 a month and this continues to drop as they keep re-calculating the monthly payments each year.

That's not correct. You can normally repay 10% off the outstanding balance a year not the monthly payment, so if the OPs loan is 200k, they can over pay 20k a year. A £200 a month over payment doesn't even put a dent in that. 
The OP is making a mountain out of a mole hill. Just keep making and same payment - although it's better off in the bank. 

YBS only recalculate your payment once a year unless you ask, so I have been underpaying for most the year and I'll just pay the extra I owe when they tell me I owe it. Each bank works differently, they are not going out their way to screw you. 

Hoenir

400ixl said:

penners324 said:

You're over reacting.

Just increase your overpayment by the amount the original repayment has dropped

Not always that simple, as the monthly rate drops, the value of the % overpayment allowed also drops. This means you can reach a point where you can't overpay as much due to breaching the limit.

If you could over pay by 10% (common limit) and you were paying £500 you could over pay £50 a month. If they drop the monthly payment to £400 then you can only overpay £40 a month and this continues to drop as they keep re-calculating the monthly payments each year.

Overpayment allowances are calculated on the capital balance owing at a given point of time and is reset annually. Not the monthly repayment that is made. As the mortgage balance owing diminishes then the ability to make sizable overpayments will naturally reduce. 10% of £15k is a lot less than 10% of £150k for example. 

Exodi

As above, 400ixl is confused.

Also to add to the above, it makes more financial sense to put the money in a savings account if it pays higher net interest. It sounds like your current mortgage may be around 2% whereas current savings accounts are paying 5%+ so it's a no-brainer. £10,000 overpaid into your mortgage would save you £200 per year in interest, £10,000 put in a saving account would generate you £500 per year in interest. It really is that simple.

There is no reason you can't dump your savings into the mortgage when your rate goes up. Even if you managed to save up a truly significant amount of money that would exceed the overpayment limits, the overpayment allowance of 10% only applies during the fixed term, so you could pile it in between a deal switch.

Newbie_John

I know that on MSE website it's stated that overpaying and reducing term is "the best way", but that's not fully true.
There are three ways of dealing with excess of money:
1. Keeping all in variety of savings/ISAs
2. Overpaying and reducing term
3. Overpaying and reducing monthly payments

They all can have the same result really, if savings provide higher interest rates than mortgage (for entire period of mortgage) - it's better to save, if mortgage rate is higher than savings (for the entire period of mortgage) it's better to overpay and reduce term), if it keeps changing over time - once mortgage higher, once savings higher.. then good to go with option 2 - which is what the bank did for you - you can save more each month and simply finish your mortgage few years earlier when you saved enough to pay the full remaining balance.

Saying all that, it's not what you expected to happen, but if you keep saving the difference between what you used to pay and what you pay now - then use it close to the end to close your mortgage earlier - then it could result in the same.

chanz4

halifax in ours say the term cant be reduced