Mortgage overpayments confusion

moneysaver1978

We started a 5-year fixed rate mortgage with Virgin Money in 2023, and we are looking to make monthly overpayments (around £200). Checking the documents and one of their points:

If you make an Overpayment of less than £500.00 or make it by direct debit, we won't recalculate your Monthly Payment straight away. However, if something happens on your account that means we do recalculate your Monthly Payment (such as a change in the Interest Rate), that recalculation will take into account any Overpayments even if they were less than £500.00 or made by direct debit. If you don't want your Monthly Payment to reduce because of the Overpayments you have made, you will need to contact us so we can discuss this. We can't guarantee that we will be able to honour your request, but we will try.

If following an Overpayment, you don't want your Monthly Payment to change, you will need to contact us so we can discuss this. We can't guarantee that we will be able to honour your request, but we will try.

What does "We can't guarantee that we will be able to honour your request, but we will try." mean? Does this mean that when we phone them, they may say no or that the overpayments went on interest instead?

We want to continue to pay our fixed amount £2000 plus £200, and would like to see our loan reduced by the time we remortgage in 2028.

I wish in this digital day and age with online banking, we could simply log in, tick some boxes, add a figure, and be done with it!

Petriix

What's your mortgage rate? 
There are regular saver accounts which pay 7.5% on £300 per month so you might be better off building up savings rather than overpaying the mortgage.
I'm not familiar with how Virgin handle overpayments but Nationwide give you a choice whether to reduce the term ir the monthly payment. 

Newbie_John

If your goal is to reduce your mortgage then keep overpaying - it does that.

You have a mortgage for £200k for 20 years and each overpayment reduced the remaining debt. Now as the debt is getting smaller - something needs changing - this can be either your monthly payment (gets smaller) or remaining period (gets shorter). 

Many banks prefer to keep the period the same, but lower the monthly payments, some allow for both, it varies.

All in all it doesn't matter which option you choose as long as you pay the same amount (if your monthly payments gets small then your overpayments would need to get bigger).

Or as mentioned earlier - you can just keep saving in savings account and pay off your mortgage when you save enough (at the end of fixed periods). Wherever % is higher - that's better option.

Hoenir

moneysaver1978 said:

I wish in this digital day and age with online banking, we could simply log in, tick some boxes, add a figure, and be done with it!

Mortgage terms are contractual and bound by the legal terms that both parties agreed to. The digital age doesn't override this . Still due process to be gone through. 

If your normal monthly payment reduces. Simply increase the overpayment. Something which has been made far easier in the digital age. 

moneysaver1978

Petriix said:

What's your mortgage rate? 
There are regular saver accounts which pay 7.5% on £300 per month so you might be better off building up savings rather than overpaying the mortgage.
I'm not familiar with how Virgin handle overpayments but Nationwide give you a choice whether to reduce the term ir the monthly payment. 

Mortgage rate is fixed at 4.28% until 2028, and we got a 24 year term. I did use the Overpayment Calculator which showed that overpaying is a better option.

Newbie_John said:

If your goal is to reduce your mortgage then keep overpaying - it does that.

You have a mortgage for £200k for 20 years and each overpayment reduced the remaining debt. Now as the debt is getting smaller - something needs changing - this can be either your monthly payment (gets smaller) or remaining period (gets shorter). 

Many banks prefer to keep the period the same, but lower the monthly payments, some allow for both, it varies.

All in all it doesn't matter which option you choose as long as you pay the same amount (if your monthly payments gets small then your overpayments would need to get bigger).

Or as mentioned earlier - you can just keep saving in savings account and pay off your mortgage when you save enough (at the end of fixed periods). Wherever % is higher - that's better option.

Unfortunately, I am a higher tax (40%) so not sure if that's cost effective, right?

Hoenir said:

moneysaver1978 said:

I wish in this digital day and age with online banking, we could simply log in, tick some boxes, add a figure, and be done with it!

Mortgage terms are contractual and bound by the legal terms that both parties agreed to. The digital age doesn't override this . Still due process to be gone through. 

Due process can still take place but in a digital way, e.g. login to mortgage portal, select the option to overpay, enter how much, provide a summary of what it means and its impact. Then submit for approval by the bank.

As it is right now, it doesn't seem like an easy or accessible experience.

Hoenir said:

moneysaver1978 said:

I wish in this digital day and age with online banking, we could simply log in, tick some boxes, add a figure, and be done with it!

If your normal monthly payment reduces. Simply increase the overpayment. Something which has been made far easier in the digital age. 

The normal monthly repayment shouldn't change though. We are contractually to pay £X a month for the next 5 years. We want to pay £Y on top of that (e.g. overpayment) so there shouldn't be any change or adjustments to the normal repayment amount.

Hoenir

The normal monthly payment will be automatically recalculated at a change of interest rate for example. That's how the systems are built. With millions of mortgages on the lenders books the process needs to be seamless. 

moneysaver1978

Hoenir said:

The normal monthly payment will be automatically recalculated at a change of interest rate for example. That's how the systems are built. With millions of mortgages on the lenders books the process needs to be seamless. 

A valid point but in our case, the interest rate is fixed for 5 years so the normal monthly payment doesn't change at least until the current deal expires, right?

BikingBud

But what does:

However, if something happens on your account that means we do recalculate your Monthly Payment (such as a change in the Interest Rate), that recalculation will take into account any Overpayments even if they were less than £500.00 or made by direct debit

Actually mean, such as what else?

I would strongly support there is no interest rate change it is fixed until 2028! So no need to recalculate before then.

Customers pay that fixed payment and the allowable overpayment until fixed rate period ends 2028. End of fixed rate period become SVR and everything is up for discussion or maybe you transition to another fixed rate by negotiating  their next period to achieve the most suitable, best fixed rate deal but the debt is reduced and the LTV is now significantly lower.

They might find that when they set out on the expiring fixed rate period they expected to have 12 years remaining  upon completion of the fix but now realise they can do it in 4 years. Or can't because the lender kept reducing their monthly payments and then started penalising as the overpayment threshold was being breached. 

Hoenir

moneysaver1978 said:

Hoenir said:

The normal monthly payment will be automatically recalculated at a change of interest rate for example. That's how the systems are built. With millions of mortgages on the lenders books the process needs to be seamless. 

A valid point but in our case, the interest rate is fixed for 5 years so the normal monthly payment doesn't change at least until the current deal expires, right?

Correct. By default it will recalculated to repay the outstanding capital balance over the remaining term of the mortgage at the current rate of interest charged. 

moneysaver1978

BikingBud said:

But what does:

However, if something happens on your account that means we do recalculate your Monthly Payment (such as a change in the Interest Rate), that recalculation will take into account any Overpayments even if they were less than £500.00 or made by direct debit

Actually mean, such as what else?

I would strongly support there is no interest rate change it is fixed until 2028! So no need to recalculate before then.

Customers pay that fixed payment and the allowable overpayment until fixed rate period ends 2028. End of fixed rate period become SVR and everything is up for discussion or maybe you transition to another fixed rate by negotiating  their next period to achieve the most suitable, best fixed rate deal but the debt is reduced and the LTV is now significantly lower.

They might find that when they set out on the expiring fixed rate period they expected to have 12 years remaining  upon completion of the fix but now realise they can do it in 4 years. Or can't because the lender kept reducing their monthly payments and then started penalising as the overpayment threshold was being breached. 

This is the part that we are most interested in and I struggle to understand why the banks don't make this easy in a plain old English even if it is in a summary box. Credit cards do that - 0% interest free until a certain date.

You agree to a fixed term at fixed interest rate and pay X/month until that term ends. All this talk about recalculations, etc. makes it harder to make sense of especially with terms like "If following an Overpayment, you don't want your Monthly Payment to change, you will need to contact us so we can discuss this. We can't guarantee that we will be able to honour your request, but we will try."

We will try?

Newbie_John

@moneysaver1978 "Unfortunately, I am a higher tax (40%) so not sure if that's cost effective, right?"

It all depends on rates - there are tax free ISAs available at 4%-5% rates, you haven't told us what's the rate of your mortgage? 
But if your mortgage is 4.5% and you can get ISA at 4.5% then overpaying and saving (which total with interests will be used later to overpay the mortgage) costs the same. Keeping money in ISA could be benefitial as it's easily accessible if you ever wished to use it - instead of remortaging and releasing it. Although one would say that overpaying mortgage in this case is better as you prevent yourself from spending it.

This made more sense when the mortgage rates were 1.5% and ISAs 5% now it really depends on preference.