Help with overpayment questions plz.

kimplus8

Quickly as I know this is a pain in the tail end.
i have contacted my mortgage provider to clarify the situation with overpayments. 

I was FTB now in 5 year fixed. 
they have said that I may overpay up to 10% of the balance each year without penalty, but it does not reduce the term of the mortgage. 

I know I am tied in now regardless but I want to know, is it still worth overpaying? 

I was thinking of just overpaying anyway and then remortgage at 5 years to a different provider? Or am I better saving that money? 

kimplus8

can anyone help me 

Hoenir

Money you overpay the mortgage by reduces the capital balance owed and therefore the interest charged. At the end of the 5 year fixed term your monthly payment will be recalculated to repay the outstanding balance over the remaining term of the mortgage. Every time you chose a new product the same principle applies. Remember interest rates can rise as well as fall. By continuing to overpay you'll most certainly be in a position to clear the mortgage earlier. 

As an example. On a 25 year mortgage term until you reach year 13 you'll still be paying more interest than you are repaying capital. Think of overpaying as like rolling a snowball. Small amounts for longer term gain. 

kimplus8

Hoenir said:

Money you overpay the mortgage by reduces the capital balance owed and therefore the interest charged. At the end of the 5 year fixed term your monthly payment will be recalculated to repay the outstanding balance over the remaining term of the mortgage. Every time you chose a new product the same principle applies. Remember interest rates can rise as well as fall. By continuing to overpay you'll most certainly be in a position to clear the mortgage earlier. 

As an example. On a 25 year mortgage term until you reach year 13 you'll still be paying more interest than you are repaying capital. Think of overpaying as like rolling a snowball. Small amounts for longer term gain. 

so it doesn't matter that it isn't directly coming off the 'term' so to speak?
Im so confused by this. if it makes no difference why does Martine advise that you ask for the overpayment to specifically reduce the term of the mortgage?

saajan_12

Depends on a few things.. 
* What's your mortgage interest rate? 
* What's your income tax band and how much savings interest do you usually earn from other sources? (as savings may be taxed)
* Can you trust yourself to put what you would have overpaid into a bank account and not dip into it? 

If you overpay then the balance reduces immediately by the overpayment, meaning you pay less interest each month. In the early years, most of the monthly payment is from interest so this has a bigger benefit.
If the term stays the same, then the capital repaid each month also reduces a little. So the benefit of the overpayment isn't as large as it could have been with a term reduction, but its still pretty large. You could put that monthly saving into a high interest account as well. 

South_coast

Your lender may not officially reduce the term, but if you overpay then sooner or later you will run out of money owing to them and the mortgage will be over. When I made big overpayments to my mortgage, the lender kept recalculating the monthly repayments so that it would run for the 20 years that were meant to be remaining. At one point, they had the payments set at £12.99/month (of which about £8 was interest 😳)! But when I'd paid them everything I owed, it didn't matter that they thought the term was still another 20 years - I had cleared the balance and they cancelled the mortgage!

Don't get too hung up on the duration, focus on the payments. If you want, you can ask for it to be adjusted when you get a new fix, although a lot of people prefer to stick with their original term (and lower monthly payments) just in case their circumstances change

kimplus8

saajan_12 said:

Depends on a few things.. 
* What's your mortgage interest rate? 
* What's your income tax band and how much savings interest do you usually earn from other sources? (as savings may be taxed)
* Can you trust yourself to put what you would have overpaid into a bank account and not dip into it? 

If you overpay then the balance reduces immediately by the overpayment, meaning you pay less interest each month. In the early years, most of the monthly payment is from interest so this has a bigger benefit.
If the term stays the same, then the capital repaid each month also reduces a little. So the benefit of the overpayment isn't as large as it could have been with a term reduction, but it's still pretty large. You could put that monthly saving into a high interest account as well. 

My rate is 5.33% and I owe £185,000.
My savings currently get me 4.5%, but that will all change in April as that offer will change, I only have £2000 in savings as I used most of what I had for my house deposit/fees etc and I am now building it back up to an emergency fund.
What I am understanding is that as long as the overpayment is coming off the capital then the term will reduce naturally, so I don't need to worry about the rest and as long as the interest on my mortgage is outweighing what I am earning from savings, it is always better to overpay the mortgage. 
I think my plan is to get back up to 3-6 months emergency fund and then over pay as much as I can up to 10% until my fix rate ends and then shop around for a better rate. Does this sound like a good plan?
I'm still feeling like an imposter that I am in the position I am with even getting a mortgage, so getting my head round it all is a bit overwhelming.

kimplus8

thank you so much to everyone who has advised. I am feeling so overwhelmed and get crippling imposter syndrome when I feel I am doing right so just checking and double checking before I pour my heart into this house. 
I really appreciate anyone who takes the time to give me some forum support. 
x