Overpaying mortgage payments

joseph80

saajan_12 said:

Depends on exactly how the following monthly payments are adjusted - if they don't change, then no difference. If overpaying the interest only portion reduces that portion of the monthly payment, then then you don't get any compounding benefit of your overpayments. Its usually possible to keep the monthly payment fixed for a capital & interest mortgage, whereby in the following months there's a little less interest due so that bit of your monthly payment goes to capital, thus compounding the effect. 

Thank you - I had read that a couple of times to get my head around what you mean, but I see your point. NatWest however seem to be saying that it is not possible to keep your monthly payments at the same level whichever element we pay a lump sum off. 

I wonder whether it is more beneficial to just change/increase our monthly repayment amount (for one portion or the other) rather than paying a lump sum? Would that be more beneficial (although NatWest suggests that that doesn't decrease the term).

badmemory

What about a savings account that you cannot take out of until the stated date.  Many fixed rate ones are like that.  Then you could pay of the larger sum when your mortgage rate ends.

joseph80

badmemory said:

What about a savings account that you cannot take out of until the stated date.  Many fixed rate ones are like that.  Then you could pay of the larger sum when your mortgage rate ends.

Would need to be an ISA due to the tax implications of the interest, so I'd need to wait until April to do that. But yes, maybe if I lock it away it would be a good idea and I just need to ensure it can be accessed by the end of Nov 2027 so I can use it when the fix ends. 

At that point, which portion would be better to reduce?

Hoenir

joseph80 said:

badmemory said:

So it doesn't matter which you pay but the sooner you pay it the better as it will save you interest.  Check though that the interest only one doesn't just reduce the monthly payment if you overpay as that may reduce how much you can overpay in future & for any T &Cs which may be different.

On the online overpayment calculator (NatWest as that is who we hold our mortgage with), it shows that by paying £5k off the Interest Only balance, the balance reduced by £5k (so remaining balance would be £26k) BUT the monthly payments would also go down which isn't what I am trying to do, but I don't think NatWest will allow me to keep my payments the same. 

Doesn't stop you from overpaying the repayment mortgage if you've hit the annual limit. 

joseph80

Managed to speak to NatWest today. Rather than overpaying, we are going to reduce the term (which I think in a round-about way is the same thing). So we'll pay £100 more a month than currently (on the repayment account) and reduce the term to whatever that would make it (so roughly from 15 years to 13 years or even 12 years and 10 months or so).

Alongside this, we may pay £5k off the interest only account by making 5 x payments of £999 (the reason being that  lump sum overpayments under £1,000 do not reduce the monthly payments. 

Any reason why not to do the above?

From my rough calculations, the above would give us the following balances by the end of our fix in Nov 2027:

£26,087 (Interest only)
£77,006 (Capital and Interest)
Remaining Term = 10 years

badmemory

Any extra you have available at the end of the fix could be paid off penalty free before the next fix.

joseph80

badmemory said:

Any extra you have available at the end of the fix could be paid off penalty free before the next fix.

Sorry - not sure what you mean. Do you mean, if we have any spare cash in the bank we could use that to pay a lump sum penalty free at the time of fixing? We can overpay by 20% of the balance anyway each year and unlikely to have cash available beyond that level anyway. 

I'm wondering however whether this part of my plan is sensible "Alongside this, we may pay £5k off the interest only account by making 5 x payments of £999 (the reason being that  lump sum overpayments under £1,000 do not reduce the monthly payments"?!?

Thank you for your advice :-)

joseph80

Having second thoughts about part of above - does this make sense:-

Interest Only balance is £31,087 - costing us £89/month (i.e. the interest is £89/month). 

1) If we pay of £5k, that will reduce the balance to £26,087 AND the repayments will be reduced to £75/month and the term would remain the same BUT isn't this irrelevant if we are intending/hoping to pay this balance off before the term anyway?

2) If we pay 5 x payments of £999, that will reduce the balance to £26,087 BUT the repayments will stay the same (£89/month) - therefore the 1st option is more beneficial. 

The more I'm thinking about this the more options I'm coming up with!

badmemory

But in option 2 your payments remain the same as before so you will be paying it off in a shorter term

joseph80

Right, decision made (I think!) - I know this completely contradicts my previous posts 😳

We are going to pay £5k off our repayment (capital and interest) balance. 

We are then going to immediately reduce our term to 13 years (for both our balances). 

Then in 2027 when our fix ends, we will move as much of our interest only balance as we can afford onto our repayment balance (which by then will have reduced nicely due to paying off £5k and reducing the term). This would leave us with a ‘comfortable’ 10 years left and a much smaller interest only balance. 

Hopefully out of the many options we could play around with, the above is a fairly sensible move?