Mortgage Overpayments Paid To Interest

BikingBud

To my mind capital is a nominal figure - it is set when you take the loan.

The payment projections will account for that nominal figure and the projected interest over the life of the loan to ensure you pay off the loan at the end of the term.

The actual payments, for a repayment mortgage, will include payment to capital and payment to interest, this ratio will change over the life of the loan and is also subject to any overpayments or indeed late payments.

Overpayments, will stimulate a recalculation of the loan, the earlier projection is now wrong as you have paid additional funds. This will reassert the capital figure going forward and the interest projection over the remaining loan period. Interest rate changes will also stimulate a recalculation as the projected total interest has now changed 

In reality the outstanding mortgage is just one pot to pay off, you reduce the pot you pay less interest, you miss a payment you pay more interest. 

Bear in mind interest compounds on the way down as well as on the way up, people recognise it when saving but paying off interest reduces the debt. 

If you pay more off and that cash is allocated against interest then the next recalculation reflects the pot has shrunk, and now less interest is payable going forward, reducing the total amount paid over the period of the loan, the effect of compound interest downwards. There is less interest on the interest, if that makes sense.

@exodi commented that they had built a spreadsheet but I use this:

http://www.locostfireblade.co.uk/spreadsheet/Index.html

and find it works to keep close track, albeit it does have a very minor discrepancy due I think to overpayments being treated, interest recalculation, by month and not day-by-day.

You should find the end game, total amount paid over period of the loan, is the same.

I would take the £250, thank them and stick it back into the mortgage as another overpayment!

ETA - The point might be that people recognise paying off interest early as the significant benefit, compounding down, but as mentioned the reality is it's all just one pot. 

Exodi

BikingBud said:

@exodi commented that they had built a spreadsheet but I use this:

Yes, but without trying to be rude, I think it would be lost on the OP.

BikingBud said:

I would take the £250, thank them and stick it back into the mortgage as another overpayment!

Indeed. My sympathies are with the Nationwide customer service team as I suspect they offered £250 from being absolutely exhausted by the OP's unwavering complete certainty that they've been wronged.

BikingBud

There are routes to try and help understand. I found it aided my knowledge especially in assessing if overpayments and especially early resettlement might be worthwhile.

But yes spreadsheets can for some be daunting. Others enjoy it:

Psbcuddles

Thank you MWT

That's the question I need to ask Nationwide, can they demonstrate that I paid more to capital than to intrest from my monthly mortgage payment following making a mortgage overpayment.

I can't see any significant difference from the documents they sent me, but if they can demonstrate that, that is what has happened, then that is my problem solved.

Thank you so much.

I can't work out how to reply to people, could someone please help me out, I would like to be able to reply to MWT as the example above, but I just can't work out how to do it.

Thank you for all your help.

I will update this when I have spoke to Nationwide.

MWT

Psbcuddles said:

I can't work out how to reply to people, could someone please help me out, I would like to be able to reply to MWT as the example above, but I just can't work out how to do it.

At the bottom of the post you want to reply to you will see this:

Just click on 'Quote'.

Psbcuddles

MWT said:

Psbcuddles said:

I can't work out how to reply to people, could someone please help me out, I would like to be able to reply to MWT as the example above, but I just can't work out how to do it.

At the bottom of the post you want to reply to you will see this:

Just click on 'Quote'.

Thank you so much MWT I appreciate your help. 

Flower1976

I’m going to use an example.
Balance 31 December 2023 £100000
interest rate 4%

Normal monthly payment £500 paid on 1st of each month
overpayment of £1000 paid 10 January 

interest for January will be calculated on the balance of £100000 for 31 days:

£100000 x 4% x 31 / 366 = £338.80

They then credit an amount of interest following your normal payment:

£500 x 4% x 31 / 366 = £1.69

They then credit an amount of interest following your overpayment:

£1000 x 4% x 22 / 366 = £2.40

That means the total interest charged in January is £334.71 (£338.80 - £1.69 - £2.40)

A breakdown for January is:
Balance 31/12/23 £100000
plus interest £334.71
minus payments £1500
Balance 31/1/24 £98834.71

interest for February is then based on the balance at the end of January and interest credits would then be applied following payments. 

Not sure if you will find this helpful but hope it makes sense and maybe you will be able to use this example to balance the interest charged on your mortgage.

Hoenir

A quote attributed to Albert Einstein

"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it,"

Have a play with this calculator. Ignore the $ signs as could equally be £. 

https://www.calculator.net/amortization-calculator.html

jimjames

Psbcuddles said:

Thank you MWT

That's the question I need to ask Nationwide, can they demonstrate that I paid more to capital than to intrest from my monthly mortgage payment following making a mortgage overpayment.

Having had a Nationwide mortgage myself and made overpayments I found that they do apply the payments in lieu of the normal monthly payments if they are made before that payment in the month. So if your normal payment is £250 pm and you overpay by £400 then it will only show £150 as being an overpayment because the other £250 has been assumed as your normal payment due.