Quick question about daily/monthly interest

Jazzking

Hi, I wonder if someone could give me a nice concise answer on the following:

Direct Line have 5 year fixed at 4.79%, my monthly payments would be £458. Interest is calculated daily. They allow overpayments, but the minimum overpayment is £200, but it taken off the loan amount immediately. This mortgage is not portable.

Alliance & Leicester have a 5 year fixed at 4.54% which would shave around £15/month of my payments taking it to £445. Interest is calculated monthly here, and although they will allow overpayments of less than £500, it will only have an effect at the end of the month. Overpayments of more than £500 will take effect immediately. This mortage is portable

I get paid on the 15th of the month (no idea when these two companies would take payments, does it vary from customer to customer?)

Assuming everything else (arrangement and valuation fees etc) are equal, would I be right in thinking that the A&L product is better since the rate is lower even though it is on an monthly interst basis?
To be honest, I probably won't be making that many overpyments in the first 5 years of my mortgage, and any spare cash I do have will prob go in an ISA - so on the face of it, is the lower rate from A&L (and the flexibility) enough to compensate for the monthly calculations?

Hope you can advise, my head's spinning tonight!!

lisyloo

I have a mortgage with Alliance & Leicester.
My mortgage started on 2nd of the month and they take payments on 2nd (in advance), so I reckon that payments start on the day you take the mortgage. You can change it if that is inconvenient but note it might mean extra interest.

Off the top of my head I would say that the A&L deal looks better because if you aren't making any overpayments then it won't make much difference, however don't forget that your cirumstances can change in 5 years and having flexibility is no bad thing.

Is there a difference in fees between them?
Note that A&L have high fees for exiting (£295) so if you aren't going to have the mortgage for long after 5 years then that might be a factor.

Jazzking

Hi lisyloo, thanks for your reply.
So essentially, if I'm not making overpayments, A&L looks to have a better deal. I don't think either of these two products are "fully flexible" in that you can make overpayments/underpaymenst as you wish, and take out any extra if you need to, but that's not what I'm looking to do; I'm really looking for the best rate.

Arrangemnet fee of £449 for Direct Line, a mere £1 cheaper than the total fees for A&L! The valuation fee from DL is £35 cheaper however I don't think that's a deal breaker...

IIRC, the exit fee for DL is high (compared to others like nationwide), I think £250 but I can't find it mentioned on the site though...

Will give it some thought today anyway

Ian_W

Jazzking,
No mathamatition [can't even spell it!!] but I've seen some brokers replying to posts saying the difference between daily & monthly is marginal. The ones to avoid if making overpayments are annual interest.

Can't be sure but I don't think changing your date will cost you "more" interest - it will just mean the month you change may have extra days to pay at that time - ie 2 to 15th would involve 13 days extra interest payments on that month only. Ask A&L.

A&L certainly does look the better option on the face of it.

EDIT: Check out post 67 on THIS THREAD. Two points is suggesting on their A&L product you CAN overpay £500pm BUT it only gets applied to the mortgage twice a year!! That could make quite a difference.

Jazzking

Hi Ian,

Thanks for pointing that out, although I think they may have changed that recently - they allow you to make a 10% overpayment in January with no penalties. According to their KFI:

If you make a regular or lump sum overpayment on your mortgage of less than £500, the amount you owe, and so the amount of interest you pay, is not recalculated immediately, but at the end of the month in which the overpayment is made.
Overpayments of more than £500
If you make a capital payment, the amount you owe, and so the amount of interest you pay, is recalculated and reduced immediately. This provides you with benefit immediately.

However, we allow you to make one penalty-free overpayment in every January that falls within the Early Repayment Charge period on the condition that the amount is £500.00 or more over the monthly payment due each January.

Twopints

A&L differentiate between "Flexible" and "non-flexible" products i.e. those that DO allow Overpayments and those that don't. For example, my current fixed rate does allow an overpayment of up to 10% but only in January each year.

However, if you wish to reduce the loan and have either missed the January window or wish to pay more than the 10%, then you can overpay up to £499.99 per month without penalty. BUT this money does not get applied to the outstanding balance until December 31st.

The overpayments up to £499.99 seems to apply to all A&L mortgages. The 10% repayment / overpayment facility appears to apply only to what they classify as "flexible" mortgages.

I wanted to reduce my mortgage by paying a lump sump equivalent to 20% of the loan. I can't do this on my current deal, and if I move to another A&L product that has a 10% overpayment then the max I can pay off is 10%. Therefore I have started drip-feeding the overpayment in at £499.99 per month - this does not count towards the 10% and I will still be able to make a 10% overpayment in January providing that the new product I move to will allow it. I will then carry on the monthly overpayments until the whole 20% is achieved.

Jazzking

But, it says that it will be calculated at the end of the month, in which the payment was made (for sub £500 overpayments) - nothing about having to wait until December 31st... maybe it's chaged recently?

~Alex~

Twopints

Maybe. But it was confirmed to me today on the phone that it was how my particular mortgage works. I will be checking out the paperwork when I get home.

I specifically asked when the overpayments that I am making will be applied and was told "31st December each year"

Does the information you have relate specifically to the 5 year fix at 4.54%?

If so I may be going for this one myself !