Mortgage overpayment issues

Dbcas

Me and my wife have been overpaying our mortgage by the allowed 10% for the last 3yrs. 
We did it in February and in April our Bank bank reduced our monthly repayments by £320 so basically by the end of this financial year we would not have overpaid anything and they have had cash in advance.
I asked if weccould continue with the same monthly payment and they said if we did we would be penalised for overpaying on my mortgage. We are 4 years into a 5 year fixed rate, how can this be right?

Hoenir

By making the maximum overpayment within the calender year. You will be reducing the interest charged in following months. Resulting in more of your monthly payment going towards reducing the capital balance owed. This in effect will result in you making an overpayment that will incur an ERC.

penners324

You're maths are completely wrong.

All the reduction in payments will do will make sure the mortgage still lasts 25 years (or whatever term you have).

BarelySentientAI

What most people seem to miss about overpayments is that many lenders, quite rightly in my opinion, don't very the term length when you overpay.  After all, reducing the term is a contractual change and could trigger reassessment.

They don't change the interest rate, so the only thing left to change to match the original term is the monthly payment.

They haven't "had cash in advance".  You've paid off capital in advance and are then being charged less interest every single day.  Even if you end up paying the exact same amount in the calendar year, more of that came off the balance and less was interest.

If you want to reduce the term, tell them to do that and commit to the 'old' payment - you can obviously afford it at the moment - but don't be surprised if it ends up with a new affordability check. 

Dbcas

Told the Bank I want to keep the 'Old' payment and they say I can't and if I want to keep it I will be penalised for going over the 10% yearly overpayment amount.

BarelySentientAI

Dbcas said:

Told the Bank I want to keep the 'Old' payment and they say I can't and if I want to keep it I will be penalised for going over the 10% yearly overpayment amount.

Tell the bank that you want to change the mortgage term (because that's what sets the monthly payment), not that you want to change the monthly payment itself.

You might well have to pay the ERC on your fixed deal, because after all you are wanting to break the contract, but then you can get what you are seeing as the desired outcome.

Of course, being 'penalised' for overpaying is just paying the ERC on the bit you are over the allowance anyway so paying the full ERC won't be cheaper.

Or, just wait for the end of your fixed deal, then overpay by however much you want and choose whatever term length you like for your next deal without paying any ERC for it.

BikingBud

BarelySentientAI said:

Dbcas said:

Told the Bank I want to keep the 'Old' payment and they say I can't and if I want to keep it I will be penalised for going over the 10% yearly overpayment amount.

Tell the bank that you want to change the mortgage term (because that's what sets the monthly payment), not that you want to change the monthly payment itself.

You might well have to pay the ERC on your fixed deal, because after all you are wanting to break the contract, but then you can get what you are seeing as the desired outcome.

Of course, being 'penalised' for overpaying is just paying the ERC on the bit you are over the allowance anyway so paying the full ERC won't be cheaper.

Or, just wait for the end of your fixed deal, then overpay by however much you want and choose whatever term length you like for your next deal without paying any ERC for it.

What is the mortgage agreement condition for overpayments eg 10% of the outstanding balance per calendar year?  

Does it mention overpayments (any) will force recalculation of periodic payments?

If not you simply divide the start of year loan figure by 10 and that is your allowance on top of your contractually agreed payments for the fixed term. 

If they try to reduce you regular payment complain and tell them you are quite content to remain compliant with the contracted payment schedule, this includes the overpayment capability, and that you wish to shorten the term.  

You do not agree to them unilaterally changing the conditions that impose a lower payment and therefore reduce your overpayment limit going forward.

If they wish to proceed ask them where in writing, ie where in your agreement, is the basis for the recalculation following overpayment informed.

This is nothing other than for the benefit of the lender by not applying the overpayment for your best effect, ie over pay to the contractually agreed limit, retain the contractually agreed payment for the agreed fixed term, and upon completion of the fixed term reduce the term and via this reduce the total interest paid, significantly.

Veteransaver

I presume you are on a 5 year fix and it is at a decent rate, Eg 2-3%. Does it make sense to even make overpayments versus just saving the money elsewhere and then making a large overpayment penalty free once the fixed term is up?

Hoenir

BikingBud said:

If not you simply divide the start of year loan figure by 10 and that is your allowance on top of your contractually agreed payments for the fixed term. 

I doubt that it is on top of.  Not least due to the fact that computer systems will not be programmed to cope with that level of complexity. Will simply be 10% of the opening balance at the beginning of the year. The system will know what 90% is. At any point in time will red flag if it's projected to fall beneath this level. Rather than charging ERC's by default , banks in their responsible mode , will be proactive. 

This same issue regularly pops up. Understandable but actually straightforward once the mechanics are understood. 

These fees are charged as the banks themselves incur penalties with the early repayment of the tranches of mortgages that they have sold on. 

BikingBud

Hoenir said:

BikingBud said:

If not you simply divide the start of year loan figure by 10 and that is your allowance on top of your contractually agreed payments for the fixed term. 

I doubt that it is on top of.  Not least due to the fact that computer systems will not be programmed to cope with that level of complexity. Will simply be 10% of the opening balance at the beginning of the year. The system will know what 90% is. At any point in time will red flag if it's projected to fall beneath this level. Rather than charging ERC's by default , banks in their responsible mode , will be proactive. 

This same issue regularly pops up. Understandable but actually straightforward once the mechanics are understood. 

These fees are charged as the banks themselves incur penalties with the early repayment of the tranches of mortgages that they have sold on. 

Sorry? Complex? This isn't nursery school maths, these are multi billion pound banks with algorithms that are designed, set up and managed to maximise profit by managing many, many thousands of events by the second.

If you have an annual overpayment allowance of 10% the clue is in the phrase! Overpayment not total payment!

If you have £200k at the start of the year you can over pay £20k 

You might pay £1500 per month - £18k per year.

Year end balance = £200-£38k = £162k

and again 10% = £16.2k

And you are contracted to carry on paying £1500 per month, it is fixed after all.

So total payment = 16.2k+18k = £34.2k

Now £127800 *0.1 = £12780

And £18000 = £30780 total and so on and so forth

How is it anything other than that.

Please explain your understanding of the mechanics. 

There should no fees on you as you have complied with the terms.

BarelySentientAI

BikingBud said:

Hoenir said:

BikingBud said:

If not you simply divide the start of year loan figure by 10 and that is your allowance on top of your contractually agreed payments for the fixed term. 

I doubt that it is on top of.  Not least due to the fact that computer systems will not be programmed to cope with that level of complexity. Will simply be 10% of the opening balance at the beginning of the year. The system will know what 90% is. At any point in time will red flag if it's projected to fall beneath this level. Rather than charging ERC's by default , banks in their responsible mode , will be proactive. 

This same issue regularly pops up. Understandable but actually straightforward once the mechanics are understood. 

These fees are charged as the banks themselves incur penalties with the early repayment of the tranches of mortgages that they have sold on. 

Sorry? Complex? This isn't nursery school maths, these are multi billion pound banks with algorithms that are designed, set up and managed to maximise profit by managing many, many thousands of events by the second.

If you have an annual overpayment allowance of 10% the clue is in the phrase! Overpayment not total payment!

If you have £200k at the start of the year you can over pay £20k 

You might pay £1500 per month - £18k per year.

Year end balance = £200-£38k = £162k

and again 10% = £16.2k

And you are contracted to carry on paying £1500 per month, it is fixed after all.

So total payment = 16.2k+18k = £34.2k

Now £127800 *0.1 = £12780

And £18000 = £30780 total and so on and so forth

How is it anything other than that.

Please explain your understanding of the mechanics. 

There should no fees on you as you have complied with the terms.

That's the mistake.

You are not contracted to carry on paying £1500 per month.

You are contracted to pay whatever the required monthly payment is at the agreed interest rate and loan duration.