Overpayments and bank reducing monthly payments

BikingBud

Hoenir said:

BikingBud said:

Halifax are having their cake and eating it.

It's basic maths less money owed less interest charged. Pointless spouting conspiracy theories. 

And the basic maths also relies on the profile not changing to achieve the best outcome.

Halifax are re-profiling and not giving the customer the best opportunity to pay the least interest.

Not just less interest but the least interest.

New_in_the_fens

Forcing you to pay  more interest is not delivering a good outcome for you!

I’d be interested in you explaining how that is the case. I’m not clear how someone is being forced to pay more interest because their monthly payment has been recalculated, rather than their term reduced. 

For example, you could work it out on a debt of £100k, with a monthly payment of £500 and an overpayment of £200 I.e £700pm. Then tell me why it is different to have a debt of £100k, a recalculated MP of £450, but still pay £700pm. 

If the customer decided to maintain the £200 difference (so only pay £650,) then yes, they won’t reduce their debt as quickly, and pay more interest. But this is a choice, not a function of the recalculated monthly payment. 

BikingBud

amnblog said:

BikingBud said:

Wrong!

£100 per month overpayment on a £120k mortgage is £1200 per year or 1%!

Not sure it's a concession if it's in the T&Cs

My dopey maths aside. The 10% allowance is a concession and is not in the T&C's because it is a concession.

Halifax offers now carry this text...

Sometimes you may be offered the opportunity to make lump sum or regular overpayments without having to pay an early repayment charge. Details of any current offers, which can change from time to time, can be found in the 'Information about your mortgage' booklet issued with mortgage offers.

And is that any relevance to the Ts&Cs that some people on here received?

If it is the same then unfortunately they appear to have a mortgage provider that does not wish to give them the best outcome!

From my mortgage very clear in the offer:



And also tells me, which I accept as conditions:

What if interest rates go up, how could this affect your loan(s)?

Loan 1

The interest rate on this loan is fixed until 2nd July 2026 and so the monthly payment will not change until after this date.

BikingBud

New_in_the_fens said:

Forcing you to pay  more interest is not delivering a good outcome for you!

I’d be interested in you explaining how that is the case. I’m not clear how someone is being forced to pay more interest because their monthly payment has been recalculated, rather than their term reduced. 

For example, you could work it out on a debt of £100k, with a monthly payment of £500 and an overpayment of £200 I.e £700pm. Then tell me why it is different to have a debt of £100k, a recalculated MP of £450, but still pay £700pm. 

If the customer decided to maintain the £200 difference (so only pay £650,) then yes, they won’t reduce their debt as quickly, and pay more interest. But this is a choice, not a function of the recalculated monthly payment. 

Now this is basic maths, the area under the curve is less given that the level of debt reduction, the monthly payment stays the same. If you leave the term the same the level of repayment reduces and the capital and therefore interest are not reduced by as much. The steep drops are lump sum payments, the normal rate doesn't change and therefore the time to repayment reduces, the area under he curve is less.

If you recalculate the repayment, the normal rate reduces and makes the area under the curve stays larger, still smaller than orginal loan but not as good as retaining the original payment. 

The following charts show Mortgage 2 with fixed payment over 10 years and Mortgage 2 with lump sum reductions (overpayments) and a sustained monthly repayment and reduced term.


Try the calculators but sticking with agreed payment and reducing term saves more money for the customer and conversely it reduces the interest for the mortgage provider.

It is really disappointing that people on here, a money saving site, cannot support this fundamental, mathematically  and factually correct principle and consistently say the banks are right because it's in their Ts&Cs.

Whatever happened to providing sound financial advice, to provide the consumer with their best outcome, rather than just appearing to support the institutions?

penners324

I don't think Halifax are acting in the best interests of their customers by being this rigid. I believe they've misinterpreted the FCA guidelines. Could be an interesting case for the FOS to look at.

New_in_the_fens

BikingBud said:

Now this is basic maths, the area under the curve is less given that the level of debt reduction, the monthly payment stays the same. If you leave the term the same the level of repayment reduces and the capital and therefore interest are not reduced by as much. The steep drops are lump sum payments, the normal rate doesn't change and therefore the time to repayment reduces, the area under he curve is less.

If you recalculate the repayment, the normal rate reduces and makes the area under the curve stays larger, still smaller than orginal loan but not as good as retaining the original payment. 

The following charts show Mortgage 2 with fixed payment over 10 years and Mortgage 2 with lump sum reductions (overpayments) and a sustained monthly repayment and reduced term.


Try the calculators but sticking with agreed payment and reducing term saves more money for the customer and conversely it reduces the interest for the mortgage provider.

It is really disappointing that people on here, a money saving site, cannot support this fundamental, mathematically  and factually correct principle and consistently say the banks are right because it's in their Ts&Cs.

Whatever happened to providing sound financial advice, to provide the consumer with their best outcome, rather than just appearing to support the institutions?

Thank you. I’ll give this some more thought and work through some examples. I wanted someone to provide more information as on the face of it, I don’t see a difference - so I’ll investigate and reflect. 

Also remember that lots of people are members of this forum because they want to learn - not everyone is a maths expert or a financial whizz. If they were, this forum wouldn’t exist. You can explain your points kindly - hence why I asked for specific examples 🤷🏼‍♀️

Strummer22

BikingBud said:

Hoenir said:

BikingBud said:

Yoduderelax1 said:

A business decision has been made to implement an annual recalculation of the monthly payments on all
mortgage accounts on their anniversary. The business decision was made following the Financial Conduct
Authority (FCA) introducing a new consumer principle that requires firms to act to deliver good outcomes for
retail customers.

Forcing you to pay  more interest is not delivering a good outcome for you!

That's a factully incorrect statement. 

Please explain that factully or factually incorrect statement.

How can paying more interest be good for the customer?
 

Because it depends on the customer's objectives and overall financial situation.

Reducing payments in response to the overpayments means mortgage term unchanged and more interest overall, but it also means more money in the customer's pocket right now. Maybe that's what the customer wants. 

ian1246

BikingBud said:

New_in_the_fens said:

Forcing you to pay  more interest is not delivering a good outcome for you!

I’d be interested in you explaining how that is the case. I’m not clear how someone is being forced to pay more interest because their monthly payment has been recalculated, rather than their term reduced. 

For example, you could work it out on a debt of £100k, with a monthly payment of £500 and an overpayment of £200 I.e £700pm. Then tell me why it is different to have a debt of £100k, a recalculated MP of £450, but still pay £700pm. 

If the customer decided to maintain the £200 difference (so only pay £650,) then yes, they won’t reduce their debt as quickly, and pay more interest. But this is a choice, not a function of the recalculated monthly payment. 

Now this is basic maths, the area under the curve is less given that the level of debt reduction, the monthly payment stays the same. If you leave the term the same the level of repayment reduces and the capital and therefore interest are not reduced by as much. The steep drops are lump sum payments, the normal rate doesn't change and therefore the time to repayment reduces, the area under he curve is less.

If you recalculate the repayment, the normal rate reduces and makes the area under the curve stays larger, still smaller than orginal loan but not as good as retaining the original payment. 

The following charts show Mortgage 2 with fixed payment over 10 years and Mortgage 2 with lump sum reductions (overpayments) and a sustained monthly repayment and reduced term.


Try the calculators but sticking with agreed payment and reducing term saves more money for the customer and conversely it reduces the interest for the mortgage provider.

It is really disappointing that people on here, a money saving site, cannot support this fundamental, mathematically  and factually correct principle and consistently say the banks are right because it's in their Ts&Cs.

Whatever happened to providing sound financial advice, to provide the consumer with their best outcome, rather than just appearing to support the institutions?

On the flip side, reduced monthly payments = more optional income now. That additional income can be used to make an additional manual overpayment- effectively achieving the same outcome (i.e. £800 normal mortgage & £200 overpayment = £1000 monthly payment. If the mortgage amount is recalculated to £790, as an example, then just up the overpayment to £210 to still pay the same amount per month). 

On the other hand, that additional disposable income can be utilised for other purposes- whether that's an stock & shares ISA, pension (tax back!), LISA or just "surprise" expenses (car or house maintainence).

Cumulatively, someone can achieve the same outcome by either method utilising overpayments - but by keeping the term the same, it allows increased flexibility should it be needed - providing a benefit *now*, rather than in XX amount of years when the mortgage is finally repaid - which is when the saved interest from the reduced term becomes an actual practical benefit, rather than a theoretical benefit, which it is up to the point of mortgage redemption - for a youngish couple with child upbringing related costs, as an example, a reduced monthly mortgage now could be argued to be far more beneficial to them than when the same couple, in 15 or 20 years, finally finish paying their mortgage off 10 years early, but when their kids are all grown up, meaning they already have a much greater level of disposable income anyway.

New_in_the_fens

ian1246 said:

BikingBud said:

New_in_the_fens said 

I’d be interested in you explaining how that is the case. I’m not clear how someone is being forced to pay more interest because their monthly payment has been recalculated, rather than their term reduced. 

For example, you could work it out on a debt of £100k, with a monthly payment of £500 and an overpayment of £200 I.e £700pm. Then tell me why it is different to have a debt of £100k, a recalculated MP of £450, but still pay £700pm. 

On the flip side, reduced monthly payments = more optional income now. That additional income can be used to make an additional manual overpayment- effectively achieving the same outcome (i.e. £800 normal mortgage & £200 overpayment = £1000 monthly payment. If the mortgage amount is recalculated to £790, as an example, then just up the overpayment to £210 to still pay the same amount per month). 

Thank you for this. Which says the same thing as I do - if you maintain your payment, regardless of a reduction in monthly payment, the effect is the same - your loan term will naturally end earlier as a result. No one has yet explained why I would pay more interest using this method, than having my loan term reduced. Interest is calculated daily on the balance outstanding, so as far as I can tell, this basic maths calculation is the same either way. 

There are other complexities, e.g. if your mortgage is coming to an end, you could run the risk of exceeding the maximum 10% overpayment and incurring an ERC on a product with penalties so have a constraint in how much you can overpay. But conversely, your provider is unlikely to let you shorten your term if the loan will finish before the interest rate product finishes as this would also incur an ERC. 

I do wonder whether it’s not a lack of understanding of basic maths, rather someone wanting to defend a position instead of answering the question. (Or a lack of basic written comprehension). 

Altior

Maintaining exactly the same fixed repayment amount has the same effect, whether the contracted payments are reduced or the term of the loan is reduced.

The advantage of having the choice is if the mortgage holder wishes to reduce the monthly contracted payments, and use the difference for something other than the mortgage.

A significant variable, which often gets missed on this type of thread subject is the real time value of money, and the impact of inflation.

Reducing the term will always show a larger interest saving than reducing the payments, but only in the finite amounts. That doesn't consider the value of the £, when the interest payments are made. 

If you had a £1000 bill payable today, but could opt to defer it for 10 years, however be required to repay more, £1100, you'd always (I hope) choose the deferral option, as £1100 will almost certainly be less valuable than £1000 is worth today (in real terms).

Broadly, the first choice is equivalent to shortening the mortgage term, and the second one reducing the contracted repayments. There are of course other variables (interest rates, access to liquid cash, employment outlook).