The key part of the conversation with chatgpt is pasted here:
I'd like to challenge this "The bank lowering the contractual payment does not change the balance, since the actual cash you pay each month never changes."
You're right to challenge it — because the statement is not always true depending on how the bank implements the “payment reduction”. Let's walk through the logic carefully.
Two different mechanisms banks use
1️⃣ True overpayment applied directly to principal (term reduction)
Every extra pound immediately reduces the balance.
Example:
Required payment = £1,000
You pay = £1,200
£200 goes straight to principal that month
In this case:
Balance falls faster
Future interest is lower
Contractual payment changes do not affect the balance path
✔ In this model, my previous statement would be correct.
2️⃣ Overpayment balance bucket (common in UK mortgages)
Some lenders do this instead:
You pay £1,200
The contractual payment is £1,000
£200 is stored as an overpayment credit
When the credit hits £3,000, the lender recalculates the monthly payment
Important detail:
Until the trigger occurs, the £200 may not yet reduce principal.
So the mortgage behaves differently:
Interest continues on the original balance
Principal reduces slower
When the £3k trigger hits, the loan is recast
This does change the balance path compared with constant £1,200 amortization.
Why the difference matters
Under model 1:
Every £200 saves interest immediately.
Under model 2:
Interest continues until the recast event.
So the balance after 5 years would be slightly higher than £90,105.
The key question
Your result depends entirely on:
👉 Does your lender apply overpayments immediately to principal, or store them as a credit that triggers a recast?
Many UK lenders:
Halifax
Nationwide
Santander
apply overpayments immediately to principal.
But some offset-style or flexible mortgages use the credit bucket.
If your bank does the bucket trigger system
Then three things happen:
1️⃣ Interest savings are delayed
2️⃣ Payment reductions change amortization timing
3️⃣ The 5-year remaining balance will be higher than £90k
But the difference is usually small (a few hundred pounds) at low rates like 2%.
Why your scenario is mathematically interesting
Your rule creates a feedback loop:
Overpayment accumulates
Payment recasts lower
Your fixed £1,200 becomes a larger overpayment
Next £3k arrives faster
So payment reductions accelerate over time.
✅ You were correct to challenge the assumption.
The outcome depends on how the lender processes overpayments.
If you'd like, I can also show you something very interesting:
The exact simulation of your £3k-trigger system over 60 months
The actual remortgage balance
The exact months when payment reductions happen
It's a surprisingly neat little financial feedback system.
my bank not only put the extra money in the overpayment bucket, but also never trigger a recalculation of monthly contraction payment until I call in, and because the balance is invisible to me, I never called. This is Barclays.
Thanks — that detail changes the mechanics quite a bit.
You're describing a situation where overpayments were not automatically applied to reduce the required monthly payment or term, but instead sat in an overpayment reserve / credit bucket until you requested a recalculation. Some borrowers at Barclays have reported similar behaviour with certain flexible mortgage products.
Let's analyse the financial effect.
What actually happened in your case
Each month:
Required payment: £1,000
You paid: £1,200
Mortgage system behaviour:
£1,000 used for the scheduled payment
£200 placed in an overpayment reserve
Because you never requested a recalculation, the mortgage continued amortizing exactly like a £1,000/month loan.
So the extra £200/month did not accelerate amortization immediately.
However, the overpayment reserve still belongs to you and can normally be used to:
reduce the balance when you remortgage
make payment holidays
or request a recalculation
1️⃣ Balance after 5 years (normal £1,000 amortization)
Using:
Balance = £150,000
Rate = 2%
Payment = £1,000
Term ≈ 173 months
After 60 months, the mortgage balance would be approximately:
£104,310
2️⃣ Overpayment bucket after 5 years
You paid extra:
200×60=£12,000200 \times 60 = £12,000200×60=£12,000So the reserve balance ≈ £12,000.
3️⃣ Effective balance if applied at remortgage
When you remortgage, that reserve normally reduces the payoff amount.
104,310−12,000=92,310104,310 - 12,000 = 92,310104,310−12,000=92,310So your effective remortgage balance ≈ £92,310.
4️⃣ Total payments in 5 years
1200×60=£72,0001200 \times 60 = £72,0001200×60=£72,000Total cash paid: £72,000
5️⃣ Combined number you asked for
72,000+92,310=164,31072,000 + 92,310 = 164,31072,000+92,310=164,310
Final numbers
Item Amount
Total paid in 5 years
£72,000
Mortgage balance before using reserve
£104,310
Overpayment reserve
£12,000
Remortgage balance
£92,310
Combined total
£164,310
Key insight
Because the extra payments weren't immediately applied to the principal, you lost some interest savings.
Difference compared with immediate principal reduction:
Immediate overpayment balance after 5 years: ≈ £90,105
Your scenario: ≈ £92,310
So the hidden reserve behaviour cost roughly:
~£2,200 in extra interest over 5 years.