Overpayments and bank reducing monthly payments

BikingBud

Altior said:

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).

Please can you explain the first bit!

If you overpay and maintain the core (previously fixed) payment, you will pay the mortgage off early.
If you overpay and reduce the payment you might run the original term or not.
Both will have a different impact upon the total interest paid.
 

That significant variable is not missed it is just not part of this discussion, no one here has asked if overpaying is the right choice just if the unilateral action by Halifax to reprofile the loan so as to minimise their interest saving is in the best interest of the customer.

Dressing it up as an affordability issue is an entirely false premise, the mortgage was agreed based upon stress testing. If customers sell a car and have 10, 20, 100k to chunk of the mortgage the previous payments are not in anyway affected, so why do they need to see if you can still afford the agreed payment.  

On the flip side if you lose your job do they demand you go in and chat?

Altior

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

This claim is not necessarily correct. 

In real terms it depends upon when the interest is paid, as well as the total amount.

That's why I referenced the factor of real time value of money. 

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 example here references paying the same monthly repayment, regardless of the contracted repayment. So for example if an individual overpays, and that results in a subsequent £50 reduction in contracted payment, they then overpay that £50 pcm instead of spending it on something else (keeping the overall monthly repayment exactly the same as the original), it has the same impact as a term reduction. That was my interpretation of what a poster was trying to clarify, that I then addressed. They can therefore still achieve the effect of a term reduction, albeit a bit of a faff (ERC excepted). 

BikingBud

Altior said:

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

This claim is not necessarily correct. 

In real terms it depends upon when the interest is paid, as well as the total amount.

That's why I referenced the factor of real time value of money. 

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 example here references paying the same monthly repayment, regardless of the contracted repayment. So for example if an individual overpays, and that results in a subsequent £50 reduction in contracted payment, they then overpay that £50 pcm instead of spending it on something else (keeping the overall monthly repayment exactly the same as the original), it has the same impact as a term reduction. That was my interpretation of what a poster was trying to clarify, that I then addressed. They can therefore still achieve the effect of a term reduction, albeit a bit of a faff (ERC excepted). 

If people want to overpay and minimise the total interest paid that is a different discussion to if their money could work harder elsewhere.  There are many other posts on what could be done to get best returns on excess income but this is not that topic. It is not the role of the lender to suggest or indeed forcibly inhibit a borrower's decision to save money by overpaying your mortgage.

If they reduce your payment then the difference between your old and new payments are now an overpayment, whereas not re-profiling the mortgage and leaving the "contracted" payment stable for the duration of the fixed term retains that headroom to reduce the capital by a greater amount, saving more interest.  

Altior

Of course there are other potentially superior options to utilise the difference if monthly repayments are lower, but as I have clarified, paying more interest could easily be a good outcome if it is paid much later. It is however much better to have that option than not. My own mortgage interest rate is circa 2% for the next four years, so I'm not making any overpayments, but when the time comes and overpaying is appropriate, I will likely be postponing some of the interest and making lower monthly payments (even though I could shorten the term).

Overpayments are a concession as I understand it, not mandated. It will be a commercial decision for Halifax to not provide shortening the term as an option for the application of customer overpayments, so we won't know why that's their position, however I don't believe it's likely to be a money making/saving one, as they will be aware of the real time value of money too. Perhaps they prefer to have a more defined cashflow in the short term, for liquidity purposes. I believe at least one lender allows overpayments of 10% of the original capital balance, which would be a wonderful option to have. If I wanted it, currently I would need to switch to their product. 

I seem to recall another lender retains customer overpayments in a type of holding account, which customers can withdraw instead of applying to the capital balance. I guess the moral of the story is for customers to give their mortgage custom to the bank that provides the options that suit them the most. 

Typhoon2000

It seems Halifax’s concession to allow 10% over payment has muddy the waters. If they stuck with the fixed 10year fixed rate and ERC payable for any overpayment during this time, there will be no confusion/ accusation about ‘Forcing you to pay more interest’. 

By allowing overpayments without an ERC they have allowed the customer to save interest. The fact that they recalculate the monthly payment whilst some other lenders don’t is a difference in the product and should have been one of the considerations when choosing which mortgage to obtain. Sometimes the overall rate which everyone uses to compare mortgage does not trump other features such as flexibility, customer retention follow on products etc…