Random mortgage question

[justchecking1]

Can anyone help?

Say my mortgage payments are £1100 per month, fixed for 5 years on a 12 year mortgage.

I then pay the 10% overpayment on the balance that I'm allowed to make per year, at the end of year 1.

Now my monthly payments for year 2-5 are only £950 per month.

Is the £150 I'm now not paying per month meaning I'm paying less interest (so the same overall amount is coming off the capital each year as would be coming off if I hadn't overpaid) or am I paying back less capital and the same interest?

Why would your payments for years 2-5 be only £950? Wouldn’t they be fixed for the rest of the term?

I'd imagine it should be less interest because the term will have reduced?

They’ve reduced your monthly payment to reflect the overpayment. Your interest % will remain the same but you will be paying less interest as the amount owed is now lower.

However, you could have kept your payments as they were at £1100 and reduced the term instead. It really depends if your priority is to shorten your mortgage term or reduce your monthly payment.

Wouldn't your monthly payments stay at £1100 for 5 years and your overpayments would reduce the capital and thus you would pay your mortgage off sooner than expected?

The payments will remain the same as you've fixed for five years.

I asked them and they say I can't keep the payments at £1100. I'm not sure whether it's because that would mean I'm then paying more than the 10% allowed (in which case it suggests that the drop in payment is only interest) or whether it's because it would shorten the term (in which case the lower payment could be reflected in capital or both)

I realise the sensible thing would have been to ask the company but I didn't think if it at the time and it was a very long phone queue, so thought I'd ask here instead!

No cos you've fixed at that cost for 5 years. just means the overall amount you owe at the end will be lower so you'll pay it off quicker. Mortgage companies will do less months to pay rather than lower monthly payments.

If they are fixed I don’t understand why they would change?
Or do you mean you should pay £950 but are paying £1100?

I'm assuming the overpayments aren't shortening the whole 12 year length of the mortgage

I'm just wondering if there's any point in making overpayments if all it means is I'm paying less capital each month but will pay the same total bill at the end.

It only seems worth overpaying if it means the total bill would be less, ie capital payments the same but less interest

No they definitely change the amount taken each month after I make any overpayment.

The amount it changes by is greater the more I overpay

Which lender is it? With Santander you need to specify whether you want over payments to reduce the term, or to reduce the monthly payment. You are currently doing the latter, but it's better overall to do the former.

I can't help with your specific query OP, but just for some of the other posters - we've overpaid with Santander and you're given the option to either reduce your monthly payments, or keep them the same and reduce the term. That's on a 2 year fixed mortgage (the fixed part is the interest rate rather than the monthly payment).

It's virgin.

I asked if I could keep the payments the same, they said definitely not

It looks like that is Virgin's policy unfortunately.

uk.virginmoney.com/mortgages/existing-customers/our-mortgage-features/

So from that link "Whilst in your Early Repayment Charge period, you are able to make overpayments of up to 10% of your outstanding balance per calendar year without incurring an Early Repayment Charge.
Any overpayments will immediately reduce the loan outstanding, resulting in a saving in the amount of interest charged."

So I'm guessing then that the whole difference is in the amount of interest paid?

Those terms don’t say you would automatically have a reduced payment. Only that you could request a reduced payment if you have a fully flexible mortgage.

Yes, it's interest.

It's not a fully flexible mortgage it's one of the everyday ones. They definitely wouldn't let me keep the payments the same as that's what I wanted to do!

I'm just checking it reduces the interest payment % and not the capital repayment, as other wise it would be completely pointless making overpayments if it didn't reduce the total bill at the end of the 12 years

It means that your term remains the same. So if you started with a 25 year mortgage you still have 25 years minus the 1 year that you have paid but because you have over paid then the amount you owe back is less but the interest will remain the same. Does that make sense? I’m not great at explaining things

I overpay as well but on the understanding that it reduces the term of the mortgage not the monthly payments. Different products allow you to do different things.

Also you will pay less interest overall over the term of the mortgage because of the overpayment. You could overpay the £150 monthly to top up the payment as long as that amount is allowed over the course of the year.

It’s still possible for you to save money if they reduce your payments. If you overpay £100 and then your monthly payment is reduced by £100 just chuck in another £100 to compensate for their reduction surely?

It’s weird though , I had assumed all fixed rates fixed the monthly payment too!

This is the important bit:

Any overpayments will immediately reduce the loan outstanding, resulting in a saving in the amount of interest charged.

So your term remains the same, but your payment reduces as the balance is less.

Thank you for asking the question, I'd assumed they all gave you the option like Santander. Something to check when we look for a new deal.

If you overpay £100 and then your monthly payment is reduced by £100 just chuck in another £100 to compensate for their reduction surely?

You can only overpay a fixed amount each year, if you pay over that amount then you'll incur charges on the overpayment.

If the lender didn’t allow me to shorten the term, I would put the difference in a savings account until the fixed term is up, and then overpay on the next mortgage - might be a workaround?

@Hayeahnobut

If you overpay £100 and then your monthly payment is reduced by £100 just chuck in another £100 to compensate for their reduction surely?

You can only overpay a fixed amount each year, if you pay over that amount then you'll incur charges on the overpayment.

It’s normally 10% on the capital at start of year. So if she has a £100k mortgage and agrees £500 payments each and in January she overpays by £100 if they then reduce her standing order in feb by £100 to £400 then even if she pays £600 again in feb she’s still only overpaid by £200 not £300.