it's very rare though for overpayment fees to be substantially less than the interest.
for example my overpayment fees are 5% in year 1 and decrease by 1% every year. it only makes sense to overpay over the overpayment amount in years 4 and 5 then. as that is when it's lower than the interest in fees. however you aren't saving much in interest.
say your interest rate on mortgage is 3% paying a 1% fee you are only saving 2% in interest and you are only saving it on whatever you overpay by over the overpayment amount.
so if he overpays by £200 over the overpayment amount he only saves £4 for 2 years max then £6 every year thereafter until his mortgage is finished if he was to stay at 3% however if he remortgages after that it's highly likely his new interest rate on mortgage is going to be lower due to lower LTV so if it drops to say 2% then again it's only £4 a year he is saving rather than £6.
basically overpayment fees are there so banks still make their "interest" one way or another.
Well yes and no.
Whilst the headline fee vs interest amount is close, its the compounding of the interest saved over many years that saves the money.
The longer the term thats being reduced the bigger the gain in paying asap vs later.
Fees don't also always decline in a linear fashion annually. Mine are fixed for first 5 then decline in years 6-10. However as I can pay down 10% of original amount as additional each year I pay this and no more.
I will actually clear my mortgage assuming I don't change plans again, before I technically come out of the early repayment period!
Your kind of right but not quite on the fees thing. For banks its clearer cut than BS who use their own funds.
Banks borrow the money to relend. So they are trying to maintain their margin with the fees, not their interest directly.
When you take a fixed term deal you are using this to hedge against interest rate rises, thats the basic fundamental reason for people to take them.
The banks will pay a higher rate to borrow the money for longer term just like you or I.
The whole issue with the credit crisis was everyone stopped lending to everyone else. It literally took the government to make money available so that lenders would start lending again.
At that point virtually everyone was getting turned down, LTV being whatever %, etc made no diff.
You only had to look at savings rates right then to see the issue, you could get 2-4% more on savings than the base rate. Why? Because the banks had capital flow issues.
The fees for coming out of fixed term deals are to stop people repeatedly skipping when the banks themselves have tied in borrowing. Its by no means their only issue but its the main driving force, they want to come out beneficial of course its all a gamble for them as well, its just a little more skewed in their favour than yours.
There is just as much chance when coming off a fixed rate you could end up on a higher one, or worse case not even be able to get one.
In 10 years we have gone from medium rates and very very very low capital availability to ultra low rates and high capital availability, it could just as easily be back to the previous position in 5 years, it could stay the same, who knows, any future prediction of rates and availability is just speculation, and with some knowledge, partly educated guessing.
