View Full Version : Mortgage Overpayments - How do they work?
I know in a credit crunch it is a bit of a silly question, but hear me out.
At the end of July our 4.79% fixed rate finished and we went on to the SVR of 6.49%, which took our mortgage up by about £150 a month and although a bit of a struggle we managed it, cutting back here and there.
Now we are still on the SVR, but our rate has dropped to 3.5%, meaning that we could potentially put £150+ into an overpayment if we were really careful and acted as if we were on the high rate.
Is it worth it though and how exactly does it work?
Dave20046
30-01-09, 12:13 PM
I always thought if you can pay more off than you usually do it just gets knocked off the debt. Is it not that straight forward? (I'm not a homeowner)
Luckypants
30-01-09, 12:17 PM
Absolutely worth it IMO. The extra payment goes to reduce the capital sum. So each month the amount you owe goes down by a little bit extra and the amount of interest you pay each month goes down a little bit more.
Now it may not sound like much in the great scheme of things, but if you make overpayments early on in your mortgage and keep it up as long as you can, then you can reduce your mortgage term by years and save a fortune in interest payments - literally thousands!
Try using the One Accounts 'mortgage shrinker' (http://www.oneaccount.com/onev3/calculator/index.html) to see the effect of overpayments on the total cost and term of your mortgage.
I always thought if you can pay more off than you usually do it just gets knocked off the debt. Is it not that straight forward? (I'm not a homeowner)
i think thats about right, my mortgage allows me to make overpayments, maybe all morgages do this i dunno only ever had two!
makes sense if you can afford it.
I guess all mortgage providers T's & C's are different but with ours we can make overpayments up to 10% of the mortgage total each year, but it has to be a minimum of £2k per time, you can't just do an extra bit each month.
As Luckypants said, definitely worth doing if you can afford it as it will save you £thousands in the long run
plowsie
30-01-09, 12:48 PM
All that needs to be said is that it needs to be done, cutting term in the long run, all be it only by a few months maybe, but hey thats a few months more enjoyment...
Just check 2 things:
That your bank won't charge you (aithough on SVR they shouldn't)
Find out when they will apply your overpayments to your account to calculate interest. i.e. sometimes they don't check how much you've overpaid & therfore reduce your interest charge until the end of the year. :( I know my bank doesn't care when in the month I pay 1st or last day is all the same to them so I pay on the last.
bluninja
30-01-09, 01:06 PM
When I worked as a mortagge advisor we had a little table that showed people that if they made the equivalent of 13 monthly payments in a year it would reduce a 25 year mortgage down to 18 and a bit and knock about £35,000 off repayment of a £150,000 mortgage.
A lot depends on the type of mortgage and how/when they calculate interest.
timwilky
30-01-09, 01:07 PM
Absolutely worth it IMO. The extra payment goes to reduce the capital sum. So each month the amount you owe goes down by a little bit extra and the amount of interest you pay each month goes down a little bit more.
Now it may not sound like much in the great scheme of things, but if you make overpayments early on in your mortgage and keep it up as long as you can, then you can reduce your mortgage term by years and save a fortune in interest payments - literally thousands!
+1 on this. I did it when mortgage rates dropped from about 14 to nearer 10% back in the 80s. I knocked about 7 years off my mortgage term and probably saved me the equivalent of about 60% of the house purchase price.
Kilted Ginger
30-01-09, 01:07 PM
If your interest is calculated daily then yes, each time you over pay 150 it reduces the capital borrowed by 150, simple.
the calculated interest you pay is based on the capital amount so if you for example pay 500pcm and 200 is capital and 300 is interest. after your first overpayment this will change to 201 capital 299 interest, the second time 202 capital 298 interest, 204 capital 296 interest.....
so each time you pay it changes the ratio of capital to interest and compounds itself thus increasing the ratio further. Ive seen examples of 25 year mortgages finishing after 14 years and saving 10's of thousands of pounds.
So in short worth it (if you can afford it) but only if your interest is calculated daily or at worst monthly. hth
jimmy__riddle
30-01-09, 01:20 PM
When I worked as a mortagge advisor we had a little table that showed people that if they made the equivalent of 13 monthly payments in a year it would reduce a 25 year mortgage down to 18 and a bit and knock about £35,000 off repayment of a £150,000 mortgage.
A lot depends on the type of mortgage and how/when they calculate interest.
wow, didnt realise the effect was that much!
[starts counting big jar full of change]
make sure its not an overpayment so you can take a payment holiday..almost got caught out with my overpayments. Had to tell them to make sure it was off the capital.
The wife has spoken to them and apparently it goes into a pot or something which means that you can take a break if required.
That is not what I want though because I am not a great saver (actually I'm crap - I just don't) so this way would mean anything left rather than being spunked on something for the bike or running stuff, would actually be going off of the mortgage.
Dappa D
30-01-09, 02:48 PM
not sure if its been mentioned as only read the op, but imo over pay over pay over pay while its cheap...BUT...be aware and check u dont get charged for overpayment....if we overpay by more than £500 a month we get a charge,.....
yes they are sly like that and will use the excuse not to reduce your interest payments, whilst keeping the money for payment holidays. So not only do you pay the same amount of interest but they keep the overpayment amount for the whole year. One other consideration that I found was I couldnt take the overpayment back out which I could with another mortgage provider. This means your money is locked in so if you can for go all your savings against the mortgage is ok.
So what questions should I be asking if I put in another call to them then?
Dappa D
30-01-09, 03:12 PM
1, can i overpay?
2, will you charge me to overpay?
3, if i am a bit short in the future and want to borrow back my over payments....will you charge me for this and how much?
4, am I entitled to payment holidays still if i overpay now.
they would be my questions mainly.
MR UKI (1)
30-01-09, 10:55 PM
I guess all mortgage providers T's & C's are different but with ours we can make overpayments up to 10% of the mortgage total each year, but it has to be a minimum of £2k per time, you can't just do an extra bit each month.
As Luckypants said, definitely worth doing if you can afford it as it will save you £thousands in the long run
Yeah, they will all be different. Ours allows £5,000 per year before incurring a penalty.
dizzyblonde
30-01-09, 10:59 PM
I'm going to get myself into gear and have a word with the bank about this one. Mines gone down by 120 quids, so I can afford to put a little more in. I'm pretty sure they said I could when i took it out. Didn''t realise you could take so much off by doing it either
Balky001
30-01-09, 11:05 PM
I'm on tracker at .49 above base and an extra £100 a months saves me about £5500 in interest over the 20 years I borrowed (obviously if rates go up I save more interest making overpayment but that's only because I'm paying more in the first place!). BUt the capital you pay off now will actually be worth more in relative terms when interest rate finally go back up as the amount you owe is less. It should also reduce the amount of time you pay the loan back. It is so worth it as long as you don't struggle or borrow to get by.
I don't have redemption penalties (nor should you on SVR) but some lenders do insist on a minimum or only allow a cetain % to be paid in addition.
kwak zzr
30-01-09, 11:13 PM
when i was tied in to my mortgage i was allowed to pay off up to 10% per year off the balance so i upped my payments £100 per month, this knocked 7 years off the mortgage term and saved me aprox 17k in intrest payments, i'm now glad i did it cus the mortgage is paid "jobs a good'un"
Best thing you will ever do!
Dave20046
30-01-09, 11:27 PM
when i was tied in to my mortgage i was allowed to pay off up to 10% per year off the balance so i upped my payments £100 per month, this knocked 7 years off the mortgage term and saved me aprox 17k in intrest payments, i'm now glad i did it cus the mortgage is paid "jobs a good'un"
Best thing you will ever do!
Until the recession kicks in and they repossess it anyway
kwak zzr
30-01-09, 11:36 PM
their is that yea :)
Dave20046
30-01-09, 11:39 PM
ever the optimist me :D
CoolGirl
31-01-09, 09:02 AM
When I was tied in to my fixed-rate tracker deal I was as allowed to make a one-of foverpayment once a year of as much as I liked (my guess is they thought peopel wouldn't be bothered to save up separately over the year then remember to pay it in, or start saving and keep dippping into it).
Now I'm on a standard variable, I can overpay every month, so given how much my mortgage has gone down, that's what I'm doing. All I've really done is set a standing order to maintain my payments at what their highest rate was on the tracker -I'm now overpaying by £350 a month and not feeling it at all, but will certainly feel the benefit in the long run!
so your other question should be "how often can I overpay"
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