Info need please, lender reduced monthly repayment after overpayments

safester

Hi,

My first post, so apologies if this info is already available somewhere but my research didn't return any positive results.

I'm two months into my second year of a 5 year fixed mortgage and after a small windfall have recently made several overpayments totalling around 50% of this years allowance. This triggered my lender to reduce my repayments by approx £100 per month. My initial response was 'Great!' but I quickly doubted it had any benefit? I don't know if I'm better off with this new deal, but my gut instinct is that I'm not.

So my questions are:

1. Has this reduction effectively increased the term of my mortgage and possibly negated the effect of my overpayments in the long run?

2. Am I under any obligation to accept this reduction or am I within my rights to ask them to reinstate my original monthly repayment without penalties?

I will be very grateful for any information / advice received on this matter.

la531983

You could just pay the extra yourself manually. Or, ask them to decrease the term which would put the minimum back up.

Either way you are still paying less interest in the long run.

sammyjammy

The reduction will be the default way they deal with over payments, the term of your mortgage has remained the same, if you want the term to be reduced rather than the payments then you will need to contact them and expressly tell them its your wish.

Brie

Any overpayment will have a positive affect as more of any subsequent payments will be going on the principle rather than interest.  You could of course continue to overpay by £100 a month to make up the difference but that will likely lead to further decreases and having to do extra payments each month.

I would certainly check with your mortgage company if you could instead have your payments remain at the higher amount rather than decrease.  Some seem to accept this.  It is to their advantage to decrease your payments as ultimately they get more interest that way rather than leaving the payments the same and effectively shortening the length of time you have the mortgage.  

Hoenir

Have you checked to see what your lender's stated policy is with regards to large one off overpayments? 

Providing you don't exceed the annual allowance. There's nothing to stop you recycling the £100 released back into repaying the mortgage down quicker. 

pjs493

I had this when my husband died and I made the maximum overpayment to reduce the interest while I waited for Probate to pay off a mortgage on a rental property he owned since before we were married. 

The mortgage company had paused the mortgage so no monthly payments were due, but the letter they send after the overpayment was made gave the ‘new’ monthly payment. 

So long as you stick within your maximum overpayment allowance to avoid penalties, you can speak to the mortgage company so they can adjust your direct debit and continue to pay what you were previously paying, or simply adjust your standing order amount if that’s how you pay. 

When it comes to renewing, you can always up the monthly payments to reduce the term. My husband and I did that a couple of years ago and knocked a couple of years off the mortgage. It’s a great idea if you take out a mortgage at a young age and your salary increases as you progress through your career. 

It’s also my plan when I buy a new house later this year. Initially I’ll need money to put in new bathrooms and a new kitchen, but once that’s done in a couple of years (or when the term ends, I’ll increase the payments to what I can afford to reduce the term).

safester

Thanks for the replies.

I think Brie's reply hits the nail on the head regarding what I was thinking, that the lender will get more interest over the longer term with reduced monthly repayments. This is what I meant when I asked in my OP if the reduction  increased the term of my mortgage and possibly negated the effect of my overpayments in the long run.

I guess I'll just have to contact them and find out what my options are.

Jemma01

the audacity!!!!!! The reduced the payment means even your allowance of overpayment is reduced, since that's usually 10%, so if that £100 is taken off, then the overpayments are reduced subsequently

Edi81

You’re getting some terrible replies on here. 

The reduction just means that at the end of the term based on the current interest rate if you paid no more overpayments you would still finish payments on the same day. 

Interest is charged daily on the outstanding. Balance so all you need to do is keep making overpayments each month. 

I had a big letter from Halifax explaining this last year and it’s really no big deal. 

Bizzywizard

Halifax have reduced my monthly payments from next month too. We also did a one off 10% lump sum payment at the end of last year. It works out to £840 that we won’t pay be paying from the original monthly payment. And yes we will do another 10% at the end of the year. But, surely I will miss the extra £840 payment too?! There seems no logic to me…..bar Halifax not liking me doing the overpayments and them not making so much out of me!

Altior

Must be remembered that you only get the benefit from shortening the term at the end of the term. Which could be many years away. Keeping the term the same, and reducing the monthly payments gives you the benefit now.

Reducing the term gives you the best headline interest saving, however that does not consider the time value of money, and the true value of a pound will be significantly less at the end of the term than it is now.

Generally, there is only a benefit from overpaying a mortgage if the interest rate is higher than the market interest rate for cash savings and ISAs. You could just put the extra £100 pcm in cash savings, and do a lump sum payment if/when saving rates fall again. It would however be helpful to know what your fixed rate is.