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]

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]

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' to see the effect of overpayments on the total cost and term of your mortgage.

Originally Posted by Dave20046

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

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...

[Stu]

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.

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]

Originally Posted by Luckypants

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.

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