The biggest mortgage scandal-banks putting aside your overpayment without capitalising it

[Bobbobrichard]

I'm shocked to find out on my re-mortgaging that my bank has not used my overpayments that I accumulated over the years but allowed them to accumulate in a pot, waiting for me to call to capitalise them.

When I called they told me that some can have 10s of thousands in their account, this money was not used to pay mortgage (they picture a pretty picture saying it reduces the mortgage terms but that does not really reduce the amount of money you'll be paying in total for as long as you re-mortgage).

The amount on that pot is also not visible to you on the app, so people would just pay into their account blindly without seeing their mortgage going down. It is a financial mind twister that most people would not understand.

Please people who have financial background explain. Also, lawyers, it sounds like they're using this information barrier and professional barrier to create difficulties for you to make your money work for you.

Had my overpayment been capitalised earlier, my mortgage monthly payment would have gone down significantly, and my re-mortgage monthly contract payment would not have been as high. If feels like living in a rental property again! As the interests are calculated by days, every day I'm paying the bank same rent to live in my property, even that my borrowing has got less and less! Does that make sense?

I made a complaint but got rejected. AIBU?

Is there nothing in your mortgage offer letter which covers overpayments and how they should be applied?

This. Are you shocked because you didn't read the terms and conditions?

I'm shocked because I never realised how much finantial loss this means to me until I capitalised the accumulated overpayments in that pot.
It has reduced my monthly payment by 1/8. Some of the money has been paid in and been sitting in the pot for over a year without generating any interests or being used to pay my mortgage. When they say they're used to reduce the terms this is non-sense, as it does not bring any real benefit in how much you're paying overall. Imagine if these were capistalised earlier my re-mortgage monthly payments now would have been so much cheaper.

When we overpaid a lump sum (10% of the outstanding value) on our mortgage, the payment amount changed the following month, and the outstanding value reflected the overpayments immediately.

Smaller monthly overpayments dont change the monthly payment, but the outstanding balance still reflects the overpayment.

The T and Cs are normally pretty clear about overpayments.

I read it but I didn't understand it. They say the overpayments when reaching a threshold are used for part-redemption but when below the threshold are used for paying the interests, this is misleading. The only way to pay off the mortgage faster is part redemption, not paying the interests. Because so long as you're still borrowing the same amount, you'll pay monthly interests for as long as you are borrowing the same amount with the bank, then you remortgage the same amount, the payment goes on for ever. This is what I did not appreciate before.

Most banks will give the options of reducing the term or the monthly payment when the overpayment is made.

They might work it differently behind the scenes but if the goal is to pay off your mortgage quicker than the situation you have described is what you choose. Obviously the alternative reduces your monthly payment but will cost more in interest over the piece. As your term will remain the same.

I don’t understand. When I overpay I have the choice whether the overpayment reduces my mortgage term, in which case it comes straight of the balance, or reduces my monthly payment in which case the monthly payment changes but the balance doesn’t. Are you saying your bank has a third option?

But with the same amount of overpayment, say, you overpay 1000, there's a difference whether you capitalise it, or let the bank put it in a pot.
My bank put it in a pot and only capitalise it if I call them.
They did not let me know that they're waiting for me to capitalise it, and they are also not showing that "pot" on my app, so I could not see that I needed to do it.
I capitalised it late, had I done it earlier, my overall payment for my mortgage would be significantly lower. So far from reading people's reply, I don't think most people have realised this layer.

Iirc mine has in t&cs that overpayments go aside but they are accounted for, so interest is not calcumatef as if I never overpair. If that makes sense.
So you shouldn't have any financial loss if it's similar.

Edit to add:it also stated that my payments or time outstanding will not automatically reduce, which I took as not during fix

I have the same question.

I can’t make out if you wanted to reduce the payment and they reduced the term instead.

Or if you’re saying it’s say in some sort of holding pattern awaiting your instructions and neither the term nor the payment have been reduced?

Can you explain why it means you pay off the mortgage quicker if the overpayment is not capitalised for part redemption?
Say if I have a 20 years mortgage, and after my overpayment pot accumulated to 2 years worth, then my remaining term is 18 years. It seems shorter but, you're not gonna stay on variable rate for the rest 18 years, right? Then after 3 years you re-mortgage, and because the 2 years worth of money was not used for no part redemption, the new borrowing amount is the same as if you did not make the overpayment at all.
But had the money been capitalised earlier (the bank does not do it for you unless you call), then this money is used in a more efficient way to pay off the capital earlier, which would reduce your interest thereafter, and make you pay less overall for the same mortgage.

Reducing the term is the same as holding, I have found out. This is a fancy way for the bank to make you believe your money has been used to "pay your mortgage", where it actually hasn't. See my above explaination.

From generally reading around overpayment

I was always told that you have to tell them specifically "this amount should be paid off from the capital". I used to do that with work bonus payments. But in those days you could go into the bank and tell somebody that it was being paid off the capital, and they would print out a statement showing you that.

I do think that it's completely normal for them to put it in that pot unless you specify that it is to pay off the capital. I did also find that a bit mad. But I also had to do that, years ago - actually make a specific instruction.

Are you saying you're not allowed to do it at all before the certain threshold? I was not allowed to do it for the first couple of years I think. So it was limited by time rather than prevented by an amount of money.

I e always have to expressly inform them that my overpayments are to reduce the mortgage term

The amount of interest you will be charged every month is lower so the mortgage balance is going down. Some customers don't want the payment amount to change but the mortgage balance would be cleared quicker keeping the repayment the same,
Banks don't have a slush fund for your overpayments to go into they will be applied to your account and the balance reduced accordingly.
You can normally ask for the monthly repayment to be recalculated but this isn't done automatically unless there is a rate change.

Not in my case? I can literally see the mortgage balance reduce by the amount I’ve overpaid. My mortgage account is on the app so I can keep track of it. They also tell me each month how much the term is reduced by.

I guess I did not know that I needed to do that, I pay a rounded number each month so overpayment accumulated to a large sum without me knowing. Also I did not know that it was not used to pay my mortgage, because when I instructed them to capitalise it, my monthly payment reduced significantly. So I believe it was not used at all.
The bank customer service yold me it was used to reduce the terms, however if I don't see any real term difference then I suppose it didn't help.
The bank leave it to me to call them to utilise this money, but this balance was not visible to me on the banking app, so that's an imbalanced information which put me in disadvantage, the money could have worked for me more efficiently, instead of being wasted like this.

Can I ask which bank is that? I'm thinking about switching. Can you PM me?

And when you overpay, do you need to call the bank every timecwhen you overpaid? Or do you just pay a bigger amount than the contractual payment without letting them know?

Interesting. Maybe my understanding was wrong, the money I overpaid (without letting my bank know) was not used for reducing the term, nor the monthly payment. It was simply set aside in a pot that is invisible to me, without being used (they say capitalise) to pay my mortgage.
I could have generated interests had them been in a monthly saver.

OP is this Barclays? If yes then technically the overpayments do sit in a separate account until you ring to capitalise them, but you will only be paying interest on the balance less the overpayments.

ETA, it’s not a scandal as you’re not actually losing out on anything, but if you feel they have not been clear in their information you should complain.

It sounds like an offset mortgage where excess funds are held in an offset account. You then pay interest on the mortgage amount minus the amount in your offset account. Basically your monthly interest is less due to the offset account. If your monthly payment stayed the same then you have been overpaying with the extra probably going into your offset account each month. Hence why the offset account has accrued so much. Once you capitalise the offset account it comes off the principle and the interest will go down. So in simple terms instead of capitalising monthly and paying down the principle you’ve accrued it over time and paid off one big lump. The end result should be the same though.

Because more of your monthly payment goes towards the capital.

For example:

If we assume a 4% average interest rate over the course of the mortgage ( this is really just to illustrate the point) and you have a 200k mortgage over a 25 year term and have paid a 20K overpayment then you're only paying interest on 180K. In your circumstance the monthly payment didn't change so more of it going to the capital than before then you'd shave roughly 4 years off your mortgage and save circa 30K in interest.

When you remortgage then your balance would be lower (not just because of the 20K overpayment) than it would be had you chosen to reduce your monthly payments because more of monthly payment would be servicing the capital than it would be if you were paying interest on the full 200,000 in the example above. In my example it would be circa £67 per month more going towards the capital so excluding the overpayment itself the balance would be roughly £1600 less.

I was also confused because I'm with TSB and have a regular monthly overpayment set up and see these payments on the mortgage app. When I've made a one off lump payment that also shows immediately on the app. However the explanation re an offset mortgage above makes sense and maybe this is what the OP is describing!?

OP I'm fairly certain it would still have benefited you, as previous posters have said. If not, I'd be making a complaint with the financial ombudsman.

For my mortgage, if I overpay it doesn't recalculate my monthly repayments unless I explicitly call and tell them, so I'm effectively subsequently overpaying each month and offsetting additional capital.