Confused about overpayments with Virgin Money

badatDIY

So let's say we currently have a contractual mortgage payment of £1500 a month, on a mortgage worth £320,000 (I've changed the figures) fixed for 5 years with a total term of 23 years. Currently we are overpaying £500 a month (this figure is true), all paid via direct debit on the 1st of the month. As far as I am aware, this overpayment is currently going towards reducing the term but I don't know that for sure (it's going towards paying off the capital at least).

I am moving jobs and need to move our mortgage payment later in the month (to say the 5th). I rang Virgin and they said "all our direct debits go out on the 1st of the month, you will need to cancel that and set up a standing order". Fine, happy to do that. However, they then mentioned that each month I make an overpayment of £500+ (we plan to continue doing the £500) they will recalculate my contractual payment downwards and send me a letter confirming that (she guessed by small amounts - e.g. like £7). So the term remains 23 years or whatever it was when we remortgaged. She warned this would have an impact on our overpayment limit (but we won't get anywhere near that with £500 per month). This is because contractually we are locked in for 23 years so they have to lower the payment amount. Currently, paying by direct debit, the monthly contractual amount remains the same despite our overpayments.

Is this going to make me financially worse off? Better off? I can't get my head around it, to be honest. She couldn't really explain why they do it differently for standing orders vs. direct debits, just said it's a different calculation. Ultimately we will remortgage at the end of the 5 year fixed rate (only 6 months in) so the total term time and whether it reduces or not is kinda moot?

Can someone please explain whether this matters or not in the long run? I think it's worse for me to do it this way? Presumably I could be cute and just overpay by £499 per month, thus avoiding this nonsense?

born_again

Simply way any overpayment reduces the outstanding balance, as that is then lower, you end up paying less interest.

When your fixed term ends, you could remortgage for the outstanding amount over a shorter term, or leave term as it is now, with lower payments.

Some lenders will reduce term, others reduce the monthly payment. 

Bottom line is the more you pay, the less the interest is. So over 23 years, that will be a very healthy amount less paid.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

badatDIY

born_again said:

Simply way any overpayment reduces the outstanding balance, as that is then lower, you end up paying less interest.

When your fixed term ends, you could remortgage for the outstanding amount over a shorter term, or leave term as it is now, with lower payments.

Some lenders will reduce term, others reduce the monthly payment. 

Bottom line is the more you pay, the less the interest is. So over 23 years, that will be a very healthy amount less paid.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Why does the advice on MSE website say always reduce term, not payments though?

lfc321

badatDIY said:

born_again said:

Simply way any overpayment reduces the outstanding balance, as that is then lower, you end up paying less interest.

When your fixed term ends, you could remortgage for the outstanding amount over a shorter term, or leave term as it is now, with lower payments.

Some lenders will reduce term, others reduce the monthly payment. 

Bottom line is the more you pay, the less the interest is. So over 23 years, that will be a very healthy amount less paid.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Why does the advice on MSE website say always reduce term, not payments though?

Because (assuming you can afford to maintain the level of payments), keeping payments the same and reducing the term will save you more money, as you'll end up paying less interest on the loan.

badatDIY

lfc321 said:

badatDIY said:

born_again said:

Simply way any overpayment reduces the outstanding balance, as that is then lower, you end up paying less interest.

When your fixed term ends, you could remortgage for the outstanding amount over a shorter term, or leave term as it is now, with lower payments.

Some lenders will reduce term, others reduce the monthly payment. 

Bottom line is the more you pay, the less the interest is. So over 23 years, that will be a very healthy amount less paid.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Why does the advice on MSE website say always reduce term, not payments though?

Because (assuming you can afford to maintain the level of payments), keeping payments the same and reducing the term will save you more money, as you'll end up paying less interest on the loan.

Okay, so by doing it this way (standing orders) I will be losing money?