Mortgage overpayment when mortgage rates differ

Tarama

Hello

I am hoping someone can give me information about overpaying a mortgage with Nationwide. This is for a family member.

They have a 25 year mortgage with Nationwide and are now at year 20 . They had a 5 year fixed rate at 1.64% which comes to an end at the end of this June (how lucky were they). They can overpay 10% of the original mortgage (£23.5K) without any penalties. What they want to do is to decrease the mortgage term to 15 years and have overpaid £17,000 this year.

They have funds to overpay up to the 10% for this year (£23.5K) and then plan to pay another £12K in this June, which NW state they can do, as they will be into the next mortgage year. This means an overpayment of £35K in total. I think this takes the term of the mortgage down to about 15 years (maybe with still a few months). The figures are based on the FR mortgage of 1.64%.

They have just arranged a NW product transfer – 5 years fixed rate at 4.24% (oh dear!).

However, when I was thinking about this I began to wonder if it would make any difference to the term reduction, if the overpayments were made when the new higher mortgage of 4.24% begins on 1.7.26. Would overpayments on this bring the term down even more or does this make any difference to the term reduction?

My math’s skills are nil I am afraid and I cannot work this out. I hope what I have said here makes sense.

Thank you in anticipation

Tarama

Woodstok2000

Overpayments go straight on to reducing the capital, so all things being equal the interest rate at the time makes no difference.

However, in a scenario like this it is possible a repayment on the second deal would result in a shorter term, but that's only because the monthly repayments would be higher.

As an example, on a £200k mortgage over 15 years.

If you repay 10% before remortgaging your New mortgage is 180k, @
4.24% over
15 years is monthly repayments of
£1353.

But if your new mortgage was £200k @
4.24%
over 15 years your repayments are
£1503.

If you make a £20k overpayment after taking that mortgage it reduces the term by 2 years. However it should be noted that 20k is then more than 10% of the mortgage balance.

Further, if you took the first option, but then made overpayment of £150
each month (so same monthly cost as option 2), your term also reduces by 2 years.

BikingBud

Try the spreadsheet file in alternate figure into mortgage 2 vice the basic position in Mortgage 1 and see what it informs"

https://www.spreadsheet.locostfireblade.co.uk/

The interest rate will change as it does from time to time. But on the basis that interest owed will be calculated daily on the outstanding capital, paying it down sooner makes the interest payable less.

Tarama

https://forums.moneysavingexpert.com/discussion/comment/81932200#Comment_81932200

Hello Woodstok2000

Thank you so much - this explanation helps me understand the situation. Thus, overpayments as I outlined above appear to be the most financially beneficial way to go here.

Tarama

https://forums.moneysavingexpert.com/discussion/comment/81932484#Comment_81932484

Hello BikingBud

Thank you for this and it again reinforces Woodstok2000's point.

These forums are rather wonderful in helping the less financially literate understand this complex financial world we inhabit.

Thank you both.