First overpayment query

ian016

Hi everyone. 
We took out our first mortgage last year (25 years) and I have made the first overpayment this week. Equivalent to 7 months payments.
I called Halifax to reduce the term but it will be a lot more involved than I realised. I have to speak to a mortgage adviser and basically reapply with the same questions again.

I am also planning to make a slightly smaller lump sum overpayment in December before the 10% allowance is recalculated. I'm wondering if my overpayment will automatically reduce interest? I know my monthly amount won't change but will more principal be cleared with each monthly payment? I think that makes sense 

If it does I will ask to reduce the term after the next overpayment when it could make more of an impact. If not I will call them tomorrow as I m very keen to reduce it (it currently ends 4 months before I'm 68).
Thanks in advance 

BikingBud

Halifax appear to be working this in their favour and not for the benefit of the consumer. 

I would expect and it works for me with Santander that my payment is fixed for the duration of the fixed interest period. The Ts&Cs allow me an annual overpayment limit equivalent to 10% of the balance on 1 Jan of that year. Check to see what it says in your specific mortgage offer

Overpayments decrease the capital by a greater rate, decrease the monthly interest more rapidly, think compounding down and by reducing the total amount payable by far the best benefit it reduces the term. Unless the bank unilaterally reduce your payment.

You should ask how their actions are delivering the best outcomes for you?

Hoenir

Overpaying will reduce the interest charged. Slowly to start with. Over time will make a real difference. 

Changing the term of the mortgage is a contractual event. Requires agreement from both parties. With all the kerfuffle surrounding  irresponsible lending and the duty of care on customers that's been imposed. Lenders now undertake thorough checks to ensure affordability etc  when shortening terms.  This is prevent the situation of a borrower facing challenging times years into the future. When job circumstances change or nterest rates were to go even higher than they currently are. 

Retaining the original mortgage term provides flexibilty as over time monthly payments will fall. There's to stop you making overpayments within permitted limits. 

Another option is to make a sizable overpayment when a fixed term comes to an end and before fixing with a new product. 

With 25 years to go there's no need to constantly be making changes to the mortgage.  It's a marathon not a sprint. A lot can happen unexpectedly. Best to keep all options open. 

amnblog

ian016 said:

Hi everyone. 
We took out our first mortgage last year (25 years) and I have made the first overpayment this week. Equivalent to 7 months payments.
I called Halifax to reduce the term but it will be a lot more involved than I realised. I have to speak to a mortgage adviser and basically reapply with the same questions again.

I am also planning to make a slightly smaller lump sum overpayment in December before the 10% allowance is recalculated. I'm wondering if my overpayment will automatically reduce interest? I know my monthly amount won't change but will more principal be cleared with each monthly payment? I think that makes sense 

If it does I will ask to reduce the term after the next overpayment when it could make more of an impact. If not I will call them tomorrow as I m very keen to reduce it (it currently ends 4 months before I'm 68).
Thanks in advance 

If your regular monthly payment is steady, an overpayment reduces your balance and therefore your interest cost which means, yes more capital is being repaid each month than would be the case without the overpayment.

The Halifax customer information booklet says...

Overpayments will not reduce your mortgage term.

Whenever we recalculate your monthly payment, we will use the reduced balance which includes your overpayments to work out the new payment over your existing term. If you want to use regular overpayments to repay your mortgage sooner, but don’t want to formally change the term of your mortgage agreement remember:

 • Any recalculation of your monthly payment will include the previous overpayments.

This means that if you only pay the new monthly payment, your loan will be repaid over your existing mortgage term.

If you would like to permanently reduce the remaining mortgage term, you will need to speak to a qualified mortgage adviser who will discuss your current and future plans with you.

It other words, since reducing the Term is a material change increasing the level of your monthly commitment, Halifax will not do this without you first speaking to a qualified Halifax Mortgage Adviser or Independent Mortgage Broker.

Newbie_John

It really doesn't make a difference what do you choose - shortening term or shortening monthly payments.
If your mortgage balance is £300k - you pay interests on £300k, if you overpay £50k - you'll be paying interests on £250k no matter if you shorten term or shorten monthly payments.
The only difference is how long will you pay intrests for - your contractual 25 years or less?

You can acheive the same financial results either way, if your monthly payment is reduced - you can save more - meaning that at some point in the future you will be able to pay off your mortgage in full before it ends (at the end of each fixed period).

Hoenir

What lenders will be factoring into their thinking is what if scenario's. Such as mortgage interest rates rising to say 7%. The expectations that mortgage interest rates will again fall to rock bottom levels is sadly misguided.

ian016

Thanks everyone for your helpful replies. I think I may have overthought the importance of reducing the term. I think I may make one overpayment a year, but definitely a large one at the end of the 5 year fix. Then try to get a 15 year deal instead of 20 if possible and reduce the term that way.
I appreciate banks have to act responsibly and I don't think my recent overpayment will be large enough to make a change in the contract worthwhile. I'll keep things simple and be glad I've saved a decent amount of interest in the long run at least. 

Altior

Shortening the term with overpayments is not an affordability issue, as the monthly payments are staying the same.

This is Halifax's internal interpretation/application. 

I recall with Santander, several years ago I shortened the term with higher repayments, and they put it through with basic checks. A couple of years later I wanted to shorten it again, and they said to achieve that I would now need to do a full application again. 

Currently I can make an overpayment and get the following choice online:

Great! Making a single overpayment on your mortgage will lower the balance and save you money.

You can choose to reduce your term or monthly payment.

It makes sense that if people want to shorten the term with no overpayments, that means a new contract and new affordability assessment. 

penners324

Just send the payments. They'll reduce your repayments, so put the difference into a savings account each month by standing order.

Regular saver or a regular saver. We use Coventry Building Society 5 Access Saver

BikingBud

Hoenir said:

Overpaying will reduce the interest charged. Slowly to start with. Over time will make a real difference. 

Changing the term of the mortgage is a contractual event. Requires agreement from both parties. With all the kerfuffle surrounding  irresponsible lending and the duty of care on customers that's been imposed. Lenders now undertake thorough checks to ensure affordability etc  when shortening terms.  This is prevent the situation of a borrower facing challenging times years into the future. When job circumstances change or nterest rates were to go even higher than they currently are. 

Retaining the original mortgage term provides flexibilty as over time monthly payments will fall. There's to stop you making overpayments within permitted limits. 

Another option is to make a sizable overpayment when a fixed term comes to an end and before fixing with a new product. 

With 25 years to go there's no need to constantly be making changes to the mortgage.  It's a marathon not a sprint. A lot can happen unexpectedly. Best to keep all options open. 

I still feel we are discussing the way Halifax have decided to operate and not sound general financial principles that money savers should aspire to.

Overpaying has an immediate effect. You pay off £50k that is less interest you are paying today and for the lifetime of the loan. Interest is calculated daily and you will gain benefit immediately, that really is a noddy concept to grasp.

Explain the contractual event please.

A fixed rate mortgage is fixed for a period. SVR are not fixed in length or interest rate, so a 25 or 35 year mortgage will likely be a mix of fixed and SVR. Within the fixed period you have an overpayment limit, you stick with this, or pay a charge.  If you transfer to the SVR there is no overpayment limit, you can settle at any time. You are not tied to 25 or 30 or 35 years, the contractual even the you are claiming is a fallacy.

Mortgages are stress tested beyond current interest rates, therefore sustaining that increased payment rate has been part of the due diligence and agreed at the point of acceptance.

Why if the mortgage continues for 35 years within that explained, tested and accepted extreme stress test does it need more due diligence? Was the previous due diligence not adequate?  If not why not, how are they abiding to FCA obligations?

On a fixed rate mortgage I commit to pay £1000 per month and the loan provider has accepted that. If it changes to SVR then that includes accepting that the repayments might increase to £1800-£2000 per month and that I can meet that revised payment, subject to interest rate changes. Why are we revisiting this stress test result? Was it not good enough first time around?

Because I have the good fortune to have excess income, perhaps via overtime that could not be considered within  original affordability, I can commit an extra £10k, 20k or perhaps even 50k per year, all within agreed overpayment conditions, not concessions.  At what point did my affordability need to be re-assessed and why did original due diligence became ineffective? On the converse if I decided to squander 20k of my income all inclusive in the Bahamas, likely more risky to me meting the mortgage payments, would the lender want to sit and chat? Unlikely!

Your comparison to a marathon is quite interesting as the total amount repaid could be equated to the total energy expended and if you can save energy early, perhaps sheltering in the group and sustain your output level (repayment) you can finish early and win the race whereas you appear to be advising over pay and still finish amongst the others because the system has forced you to slow down.

The outcome I and others seem to want is to win the race at the expense of the lenders, I pay them less interest.

I didn't agree to pay them a set amount of interest, I agreed to pay an interest rate. I also agreed to pay a fixed payment and they agreed that I could overpay in the full realisation that that would reduce the total interest I paid them.

I want them, as should other borrowers, to give me the best outcome in consideration of those terms we have agreed and not get shirty and move the goal posts because they realise I want to exploit the agreement to minimise the interest I will pay.

I don't really get why this seems alien to some and you wish to lambast posters that feel they are not getting the deal they really thought they signed up to.