Mortgage overpayment: reduce term or monthly payment?

mr_mortgage

JayZed wrote: »

I'm not interested in reducing my payment by £2 a month, but apparently that's the default option if I overpay. In other words it seems to be what the lender (Nationwide, by the way) prefers.

Do you think, perhaps, that is the default option because it's the one that benefits the bank?

I'm not sure that I understand your point about recalculating payments annually. Nationwide seems keen to do it every time I overpay - presumably because they prefer me to have the mortgage for a longer period. But does that mean that I end up paying them more interest?

It means that you may not see a reduction in your monthly payments immediately because the bank only reassess what your monthly payment ought to be once a year (Woolwich do this, for example). So, if you pay £1000 a month, and overpay so your payment is reduced by £100 a month you may still pay £1000 a month for up to a year (worst case) until your monthly payment is calculated again... then, given your original overpayment lump sum and the monthly £100 overpayments (which are now being paid because you paid off some capital wit your lump sum), the monthly payment for the next year would be about £890, rather than £900. But, this doesn't reduce the term it just shuffles your money around.

I'm sure I'm getting good advice on this thread, I think I'm just being obtuse about the maths. I think I'm going to go ahead and tell them that I want to reduce the term, since I know that will save me a lot of interest over the long run.

Good call. If I were in this situation, this is what I would do.

RizSher

I am a similar situation, mortgage with Skipton Society, which allows me a 10% overpayment per year. The 10% is calculated on the original balance, so,if the mortgage amount was 100,000, I'm allowed to pay 10,000 every year. Also the overpayment 12 month period is not a running 12 month period, its taken to be 12 months from the month the mortgage commenced, every year.

Right, so I came into some money, and thought of paying it towards the principal, the amount is just enough to make the 10% limit. My initial thinking was to pay the 10%, and continue making the same monthly payment as I have been making in the past, thereby reducing the term of the mortgage.

So, called Skipton, gave them the numbers, the lady on the phone told me it'll reduce my monthly payment by about 50 pounds or so. I said, I don't want payment reduced, I've been able to pay in the past without too much hardship, so might as well continue. But she was unable to work it out, went away to chat to someone and came back and said they're unable to calculate this as it may end up costing me more. I couldn't really understand what she meant, but was unable to get any more insight out of her.

Hung up the phone, drafted a long email to the building society, and as I was writing, I realised what the problem was. If I pay the 10% allowance allowed/year, I've used up all my over-payment allowance for that year, there is no more fat left to chew on, so, any extra payment will incur an overpayment charge, another call to Skipton revealed they'll charge 5% as an over-payment penalty to any monies over the yearly limit.

So, for the moment, I've left it at that, paid the 10%, accepted the reduced monthly payment, and in 10 months time when I'm allowed another 10% over-payment, I'll just do the same (or if I don't have that 10%, increase the monthly payment as much as I can).

In my mind I always thought reducing the term of the mortgage, from 25 down to 20 and below would be the best way to save on the mortgage, but, at the moment, don't really understand how that would be achieved. The helpline did mention something about a £50 charge for changing the term of the mortgage, will look into it further.

allan673

are you re-mortgaging?

look at first directs 5 or 10 year fixed rate offset mortgages.

you can set it up as a standard repayment mortgage, plus make unlimited overpayments if you want to.

thats what i do.

jasonprice07

I've been thinking about this question recently.
Currently I'm overpaying my Nationwide mortgage by the max allowable each month and reducing the term (Nationwide inform me each month the revised term after each overpayment). Although this gets rid of the mortgage quicker I'm not sure I'm going to pay any less in the end compared with reducing the monthly payments and keeping the term the same.

Jason