Capital Repayment v Overpayment Fund

Alfie1999

I've got a Co-op mortgage and despite chatting to a lady in their call-centre i'm not certain of the the best choice when it comes to the 'title'.

I'll summarise what i've been told:

Capital Repayment

1. Total comes off amount borrowed immediately
2. Interest calculated on the remainder
3. Extra repayment not available for withdrawal
4. £1000 overpayment reduces monthly payment by app £6
5. Monthly repayments reduce with a capital repayment


Overpayment Fund

1. Fund total is 'offset' against amount originally borrowed
2. Interest calculated on remainder
3. Extra repayment is available for withdrawal
4. Each £1000 overpayment means an extra £6 off capital rather than paying interest
5. Monthly repayments stay the same



I've been trying to work out why anyone would make a capital repayment rather than just making an overpayment.

Overpayments seem to make much better financial sense to me?

maddyfharris

I've got the same mortgage. It took a few hours for me to get my head round it as well. We do the overpayment fund. I suppose the capital repayment is useful if you feel you might be tempted to use the money in the overpayment fund. Essentially the overpayment fund is a savings pot intended for the repayment of your mortgage but because you can 'get at it' at any time that has disadvantages as well as advantages. We've found it works well for us, but only because we believe in 'our head' that it is capital repayment even though it's not; if you get what I mean?

Alfie1999

Thanks for replying.

If 'removal of temptation' is the main benefit of capital repayments then i'll trust myself to keep my fingers out of the cookie jar and stick with overpayments.

Gazella77

If you want to reduce your monthly payments immediately (or reduce the number of years) then the capital overpayment will do the trick, wiuh monthly overpayments you need to wait for recalculation till the end of a year.

But other than that as stated above if you trust yourself it doesn't matter.

I've made two capital overpayments and now I regret it as I got pregnant and may need extra funds soon on my maternity leave and obviously the money is gone now.

MarkyMarkD

As a general rule, interest only plus overpayments when you want to make them is a more flexible arrangement than capital and repayment.

But there are a number of factors which make capital and repayment better in some circumstances:

- if you are limited in the amount you can overpay - and on some mortgages you cannot overpay at all;
- if the mortgage isn't daily or at least monthly rest, as overpaying on a annual rest mortgage more frequently than annually is poor value;
- and as remarked earlier, if you don't have the discipline to make overpayments equivalent to the capital repayments.

I personally have a wholly interest only mortgage, because my payments are as low as possible and because (until recently at least) my mortgage rate was lower than my maximum tax-free savings rate (in my wife's name). We make capital payments when it makes sense to do so; our mortgage product has no limits on overpayments and whilst it's monthly interest, the interest is recalculated if you overpay by more than £500 at a time.

And all my overpayments are available, whenever I want them, as a drawdown or to support underpayments.