Mortgage Overpayment Fees

[Aruffell]

Hi all,

Hopefully a quick one but I need to see something written down in front of me to make sense of it.

Currently got a mortgage which is a higher rate than my rate of savings so it therefore makes sense to overpay on the mortgage. the only snag is that I'm on a 2 year fix and am only just coming up to 11 months in. If I overpay now, I get charged 3% of the overpayment.

I'm looking at making an overpayment of £10,000 which means I'll be charged £300. Seems simple enough. If I make this overpayment in 13 months time once my fix has ended then I won't be charged anything, but more than likely, I'll be looking to do another £10,000 then anyway.

So my question is, would it be worth making an overpayment now and swallowing the £300 fee due to the amount of interest I would save? I've already been told that my mortgage will reduce by around £50 a month by doing the overpayment which means in theory I'd have another £600 over the next 12 months to also add onto the overpayment for next year.

According to MSE's overpayment calculator, it would save me (by doing this first overpayment) £20,034 in interest alone and if I wanted to reduce the term instead, it would pay the mortgage off 2 years and 7 months earlier, but I'd rather reduce the amount and carry on with overpayments as and when.

So would I be right in thinking that if I'm going to save £20,034 in interest, then the £300 is a small drop in the ocean or would it make more sense to simply overpay £20,000 when the fix ends, avoid the fee and have the same outcome or would the interest saved in the next year make the difference to do it asap and then again in a year when there is no fee?

Thanks and sorry for the confusing post, new to all this mortgage malarkey.

Andy

 

[platypus]

To me, you've already answered the question. The reduction in interest payments pay the fine, and then some. Personally if you're happy to keep the payments at the same level (assuming a change in finances hasn't dictated that its becoming difficult to so do) I'd be looking to reduce the mortgage term by the 2 years/7months as well, but our circumstances obviously differ.

*Not financial advice, etc.

 

[Aruffell]

Just to add, I worked out some rough sums and worked out the following:

Paying off £10,000 now would save £20,034 in interest.
Paying off £10,000 in a years time after the above would save another £21,294.

Paying off £20,000 in a years time would only save £33,189.

So I'm guessing the sooner the better?

 

[Maccy]

An overpayment of £10,000 to save £20,034 doesn't seem right, unless your interest rate is quite big? Are you sure that there isn't a certain percentage that you can pay off without fees? For example, Natwest let us overpay by up to 10% per year, have you checked this?

But yeh it sounds like you've answered your own question if your sums are correct!

 

[platypus]

Almost always the sooner the better if you can afford it in these cases, due to the interest. As you've done the sums (and I couldn't be bothered too ), it seems a no brainer to me.

 

[Aruffell]

To me, you've already answered the question. The reduction in interest payments pay the fine, and then some. Personally I'd be looking to reduce the mortgage term by the 2 years/7months as well, but our circumstances obviously differ.

*Not financial advice, etc.

I thought I had too but just needed some clarification I guess.

Any reason you'd look to reduce the term instead of the amount?

My reasoning would be that if (in my mind) I was paying what I'm paying now, even if the mortgage had reduced to a lower monthly payment I could add that into a savings overpayment pot and just use that to overpay even more.

For instance, if I'm paying £500 a month at the moment but through overpaying, the amount would reduce to £400 a month, that's an extra £1200 over a year that could then be whacked down as a further overpayment, then bringing the monthly amount down again and again and so forth.

My plan is to be mortgage free in the next 14 years.

 

[The_Abyss]

Your calculations are flawed, as you should be looking at the amount of interest saved over 13 months (the period before which you can make an overpayment without triggering the fee) rather than interest over the entire term.

 

[dark-knight]

I've done this in the past and have contacted my mortgage provider explaining that I would like to pay the over payments off the outstanding balance, reducing the amount owed but not reducing the monthly payments. Which they seem to have accepted quite reasonably. I could pay a max of £499 on top of my monthly payments without being penalised for it.

Speak to your mortgage provider and explain the situation, the money I had saved was getting zero interest so I over payed every month from my savings account, you'll be surprised how much you can save in the long run and being 42 Im now mortgage free.

 

[Aruffell]

An overpayment of £10,000 to save £20,034 doesn't seem right, unless your interest rate is quite big? Are you sure that there isn't a certain percentage that you can pay off without fees? For example, Natwest let us overpay by up to 10% per year, have you checked this?

But yeh it sounds like you've answered your own question if your sums are correct!

3.89% IIRC. The joys of being treated as self employed on a help to buy, even though in the eyes of HMRC and everyone else I'm full time employed. Company director with over 20% ownership etc...

I've done this in the past and have contacted my mortgage provider explaining that I would like to pay the over payments off the outstanding balance, reducing the amount owed but not reducing the monthly payments. Which they seem to have accepted quite reasonably. I could pay a max of £499 on top of my monthly payments without being penalised for it.

Speak to your mortgage provider and explain the situation, the money I had saved was getting zero interest so I over payed every month from my savings account, you'll be surprised how much you can save in the long run and being 42 Im now mortgage free.

Yeah that was my idea.

I have good bank accounts with good rates (BOS and Tesco all offering 3% but only up to a certain amount) so anything over that is not making my money work for me as it were. This is the money I was looking to push into the mortgage as it's currently earning 0%.

Your calculations are flawed, as you should be looking at the amount of interest saved over 13 months (the period before which you can make an overpayment without triggering the fee) rather than interest over the entire term.

How would you work this out?

 

[daver]

3.89% IIRC. The joys of being treated as self employed on a help to buy, even though in the eyes of HMRC and everyone else I'm full time employed. Company director with over 20% ownership etc...

You need to work out the interest saved properly - roughly it would be about 420 quid over the year, less 300 fees less what you could get in interest having it sitting in the bank. If you have high interest banking available you should probably wait, if you can't find somewhere to put it that would earn more the 120 then do it. Either way it's not massively material if you have the ability to save another 10k in 13 months

 

[Aruffell]

You need to work out the interest saved properly - roughly it would be about 420 quid over the year, less 300 fees less what you could get in interest having it sitting in the bank. If you have high interest banking available you should probably wait

I do have high interest banking but only on a certain amount. The money I'm looking to use for overpayments is above those amounts so they are earning nothing.

 

[The_Abyss]

How would you work this out?

Crudely, calculated the amount of interest at your rate of 3.89% over 13 months on the £10,000 additional repayment. Any number over £300 will mean you'll make a saving by repaying now rather than waiting until the 13 months are up.

 

[nox_uk]

Your calculations are flawed, as you should be looking at the amount of interest saved over 13 months (the period before which you can make an overpayment without triggering the fee) rather than interest over the entire term.

correct. because in a couple of years you'll probably change mortgage providers and you'll have the option to pay off a lump sum at that point too.

3.89% of 10k = £389

13 months = £421

the fees are £300? - honestly it sounds like you have enough $$ to not worry too much between £421 vs £300. the former gives you a bit of a safety net, the latter gets some cash out of the way of temptation. its all <roughly> the same, not like you'll save thousands either way. on a purely financial level, i think you're best off overpaying. when i did mine it was worth doing up until about 8 months before the mortgage ended.

 

[Mercenary Keyboard Warrior]

Sounds about right
What your not doing in effect is discounting future cash flow though
Ie assuming some inflation a pound is "worth less" next year than this year, repeat every year into the future
Your £10k would be worth more in number terms though as well. Ie invest it at say 1% pa and its worth just over £11k in 10 years (about £11046 in fact)

Assuming you have some savings and are allowed then the only other possible question to ask is, if you needed this money could you take a payment holiday, some mortgages allow this upto the level of the overpayment.

 

[Aruffell]

Crudely, calculated the amount of interest at your rate of 3.89% over 13 months on the £10,000 additional repayment. Any number over £300 will mean you'll make a saving by repaying now rather than waiting until the 13 months are up.

So 3.89% of 10,000 over 13 months? Looking at compound interest, that would equal £430.40 unless I've done that completely wrong?

 

[Mercenary Keyboard Warrior]

Compound interest quickly gains traction, your doing exactly the same in reverse in effect by paying your mortgage early.
If your clearly able to pay more per month then keep your payments the same, assuming your interest is calculated daily then its an easy way to keep the overpayments topped up which keeps reducing the amount your paying interest on, and hence keeps by default increasing the overpayment.

You could if your up for a little bit of risk drop a bit into P2P for the year. You can earn 3%+ in the ratesetter rolling product that would normally not lock you in. I say normally because there is always a chance, but its never happened yet.
You would earn around £400 probably on the £10k and be able to pay it off at the end of the 12 months when no fee

 

[moon man]

while not answering the question i would definitely overpay ,did mine in 9 years and its nice to feel the security as the equity increases ,almost a warm glow everytime i did an overpayment.
when i paid it off bought a nice panasonic plasma (back in the day) instead of the normal payment ,felt amazing

 

[nox_uk]

when i paid it off bought a nice panasonic plasma (back in the day) instead of the normal payment ,felt amazing

that sounds sooooo good!

 

[moon man]

that sounds sooooo good!

still got it and still get comments how picture blows away anthing today(not sure if true) but i am a tight wad and to me it was like i got it for free
edit : after that it was back to saving to buy for cash down here in sunny cornwall

 

[Vern1961]

We make an additional capital payment just about every month and over the years it has reduced a 20 year mortgage taken out in 2006, to finishing in early - mid 2018 if we sustain the current levels of overpayment. Well worth doing particularly if you have enough put away in savings to cover contingencies etc.

Following on one comment above, when our mortgage was with the C&G we were always given the option of whether to reduce the term or payment (usually opted for the first). Now it's with Lloyds, they only reduce the payment every few months but the net effect will be the same as we just adjust the extra payment upward.