Overpayment Question

Capricorn_One

Hi,
I've been paying £1000 over my regular payment for the last 10 months. I've been allowing the payment they charge to me to drop by the few pounds it is each month.

Does keeping the payment the same after overpayment make a big difference?

If I instead just added the equivalent to the overpayment, that does the same thing, doesn't it?

Thanks, Ed.

jamesd

The difference is small for short periods of time. You're right that adding the equivalent to the overpayment will be fine. All that matters is the total amount paid, not whether it's the regular payment or overpayment part.

Kaz2904

If you are still paying the same amount total then it doesn't really matter. If you aren't topping up your overpayment to make up the difference between your new and original payments then your term will stay the same so really you are prepaying your mortgage. A very expensive way to do it I'm afraid.

Capricorn_One

Thanks to you both. So I suppose, effectively, I've been overpaying £1000, £992, £985, etc.
I have £56,000 left and want to pay it off in 4 years so I'd better start keeping the payment the same and reducing the term.

Ed.

getmore4less

Kaz2904 wrote: »

If you are still paying the same amount total then it doesn't really matter. If you aren't topping up your overpayment to make up the difference between your new and original payments then your term will stay the same so really you are prepaying your mortgage. A very expensive way to do it I'm afraid.

That is a bit misleading,

It still saves loads of interest and will still pay the mortgage of early just not as early as if you continue to pay the original total.

getmore4less

Capricorn_One wrote: »

Thanks to you both. So I suppose, effectively, I've been overpaying £1000, £992, £985, etc.
I have £56,000 left and want to pay it off in 4 years so I'd better start keeping the payment the same and reducing the term.

Ed.

Just keep paying as much as you can, still best to keep the original mortgage term(subject to overpayment limits) so you can drop payments should you want/need to.
Just because the mortgage term is long you can still pay it off early by overpaying. but if you automaticaly reduce the term you reduce flexability.

garsij1

be gentle with me its my first post,

im a little confused on this, i overpay my mortgage by about 700 a month and the minimum amount i have to pay has not changed (£867). what the difference in doing it this way opposed to if the min payment was dropping say 5 pound a month

sorry for appearing dumb

thanks in advance

jamesd

It's just a difference between how lenders handle it. Some reduce the monthly payment, some reduce the mortgage term, some keep the payments the same and don't touch the term either until it's repaid.

There's no difference for you, all that matters to saving money is the amount paid each month.

For flexibility in case you're out of work for a while or for whatever else happens, like christmas or holidays, it's a bit better to have lower required payments and be able to cut out the overpayments for a while and go down to the lowest possible monthly payment. Interest only is even more flexible for this than repayment because it starts out at the lowest possible monthly payment.

Kaz2904

getmore4less wrote: »

That is a bit misleading,

It still saves loads of interest and will still pay the mortgage of early just not as early as if you continue to pay the original total.

It doesn't pay it off any earlier though if you take the lenders reduced payment because they stretch out your payment to fill the original term. So as the value of £250 cash is more than it will be in 5 years time it is an expensive way to do it.

If you stopped overpayments and went back to your original required payment then you would finish early.

getmore4less

Kaz2904 wrote: »

It doesn't pay it off any earlier though if you take the lenders reduced payment because they stretch out your payment to fill the original term. So as the value of £250 cash is more than it will be in 5 years time it is an expensive way to do it.

If you stopped overpayments and went back to your original required payment then you would finish early.

You still pay of the loan early because they cannot set the normal payment below zero. There comes a point where the overpayment is more than needed to shorten the term on its own and this does not get reduced.
small overpayments against a large normal payment will have a smaller effect than large overpayment payment against a smaller regular payment.

For the OP with a £1k overpayment on a £56k loan this could be a significant reduction in term depending on the original term, in the extreme case(infinite term) going to a reducing interest only normal payment the term would not be more than 56months so as long as the orgiinal term was longer than this it will get shortend and since the OP is on repayment it will get shortened even more.

Using the word expensive is misleading since it implies it is costing something which it is not, the saving are still there just not as good as if you keep the total payments as high as possible which is kind of obvious.

It's not costing money it is just saving less.

jamesd

kaz2904, you are not generally just prepaying your mortgage payments (which would mean not paying off capital, but instead making an early monthly mortgage payment so you can skip one later) but are actually paying off capital and that produces the same benefits as any other form of payment that reduces capital.

It's no more or less efficient than any other way. It just requires regular tweaking of the overpayment amount to keep the total monthly payment at the original level.

There are some lenders which have had thresholds for when regular overpayments are automatically treated as prepayments and when they are automatically treated as capital repayments, particularly on old fashioned mortgages, and that may be the source of your thought that it's prepayment.