Making a lump-sum overpayment on my fixed rate mortgage?

cathie1

Hi all. I'm pretty rubbish at finances and don't have anyone else to ask this… I have already read Martin Lewis guidance and blog on over-payng a mortgage, but still have questions - I'm hoping some of you lovely experts might help me make more sense of what might be best to do. I realise any decision is my responsibility….

I have a 2 yr fixed mortgage (4.32%) that ends 31 Oct 2027. I'm fortunate to be able to make a lump sum payment to reduce the balance (within the lenders permitted 10% - I checked). Then if I wanted to I could pay another lump sum in Jan 2027. Lender says because their system has already (in Jan 26) set my monthly payments, even if I pay this year's lump sum now they will continue to take the same payments until the reset on Jan 1st 2027. That's fine by me as I don't want to reduce the mthly payments anyway. All sounds good but….

Lender says when the reset of mthly payments happens on Jan 1st 27 my mthly payments will reduce to take account of my 2026 lump-sum overpayment. I may not stay with the same mortgage company come Oct 27 end of fix. But anyway would like to also make a 2nd lump-sum overpayment Jan 2027 (within the limit they tell me at that time). It seems to me any benefit of making the 1st or even 2nd lump sum payment is reduced (by a lot??) because the lander will reduce my payments to take account.

My question is - am I doing the best thing here? I have an emergency sum put by as well. I think ML advises to have the term reduced, not the payments - but as I only have a fixed mortgage I probably wont stay the full term (12 years) with this mortgage company. Is it worth it to pay this or two lump sums if I am leaving in Oct 27? I will likely pay some top earnings rate tax on savings if I instead put it there….. and anyway cant see any savings that are dramatically different from my mortgage rate of 4.32%.

Any thoughts/assistance would be appreciated….I tear my hair out on such matters as also dyslexic with figures…. Thanks in advance

El_Torro

If your goal is to pay off your mortgage as soon as possible then I wouldn't overthink it, make lump sum payments where you can, while still avoiding early repayment charges. Whether the term is reduced or the monthly repayments are reduced is neither here nor there really.

cathie1

Feels just what needed to hear. Its what I thought, but dont trust myself with money/planning as I dont know that much n this area. Thank you

BikingBud

https://forums.moneysavingexpert.com/discussion/comment/81901940#Comment_81901940

But mathematically it is.

cathie1

What do you mean?

BikingBud

If you continue to pay at the agreed rate then you pay off sooner and pay less interest.

If you pay less then you borrow money for longer and you pay more interest.

cathie1

Hi - thanks you for the simple explanation. If I make a lump sum, now and in Jan 27 mortgage company Accord automatically lower my payments to take account of overpayment they said. So no choice. I think I could pay less of a lump sum and adjust the mthly payments back up to still be within the permitted 10% but not sure if that's any gain….hope I've explained the dilemma correctly. In my mind I'm working on the basis that its better to do lump sums because that has an immediate effect. Accord told me they don't produce mthly statements, only one at the end of each fixed year. If I want more they will charge me £9 per statement. So want to get this right as wont be able to 'see' amounts actually changing - until beginning of 2027 when they produce the statement.

Yorkie1

Can you log onto their website and see the balance at all?

You could also go onto the calculators part of this website and see how ad hoc and regular overpayments affect the balance and how quickly you pay the mortgage off.

If you have an immediate amount of lump sum, and you've decided to use it to overpay the mortgage (having considered the need for an emergency savings fund, possible pension contribuions etc), then yes paying that lump sum now is better than splitting it into 12 monthly amounts and overpaying more slowly, if the mortgage interest rate is higher than you'd get in savings (after tax, if your savings interest is taxed).

But if you then have a choice, for spare income, whether to use it to overpay per month or to save it up for a year and overpay at the end of the year, then steadily making inroads into the capital balance will be better than leaving it until the end of the year, again if the interest rates compare.

BikingBud

The earlier you pay off the lumps sums the better it will be in terms of reducing the overall interest payable.

Some lenders, including Halifax, will do a review annually after you paid off a lump sum, even when it is within the allowable 10% and recalculate the remaining loan to ensure it is runs over the original period.

Fo most the 10% annual allowance diminishes year on year, some have 10% of original loan, but they have also driven down the amount you will pay, hence you will not save as much.

There have been numerous discussions about how this works and there may something in your mortgage T&Cs that you agreed to that does give them the scope to do this.

To me it is them having their cake and eating it and I would likely exclude such a lender if I was seeking to get another mortgage. It does not ensure the outcome is the best for the consumer.

Others differ in their thoughts.

This doesn't consider if other options may be better, eg investing the cash you might overpay, or putting the cash into a pension for example but you may wish to ensure that getting the money out doesn't come with an unexpected tax burden.

cathie1

Just wanting to thank those of you who provided responses to my financial dilemma - all very helpful. Thank you xx