Mortgage overpayment query

[Malbab]

We bought the house last year and got a 5 year fixed rate till 2027, given how rates have been so high recently I thought anything I could save I should overpay before the remortgage is due , so we are allowed to overpay up to 10% of the mortgage amount so I paid a lump sum few weeks ago . Now I did this online and the system automatically calculates the repayment amount and got an email saying it is now less by 100 pounds , now my question is this : before making the overpayment I went to natwest overpayment calculator and put the numbers in and it said if i keep the monthly repayment amount the same I would save more in the interest as the mortgage term would be less (it said about eight months to reduce ) however when I went and did the overpayment online there was no choice to reduce the term time , the computer automatically reduce the monthly repayment keeping the term as it is
i find it very confusing that the online calculator says one thing and what I got was another thing , I feel I am missing something here , could anyone who knows how this things works help please

I know with our bank (Barclays) that monthly overpayments don’t affect the payments but that a one off lump sum over a certain %will. I can’t remember the ins & outs now as it was a phone conversation several months ago.

Have you paid right up to the maximum amount? Could you not increase your monthly payments back to what they were? We overpay by increasing the monthly payments.

No I did not pay the full 10% ( wish I had that money to do so!) but the one year is just finished so anything I overpay now will be into the next year 10% overpayment allowance

If you just increase the payments back up to what you were paying you will be painlessly overpaying a little then, towards the end of the year, you can do another smaller lump sum again.

You usually have to notify your mortgage lender how you want your over payment to be applied - reducing the term or reducing monthly payments.

Ours triggers a re calculation when I’ve overpaid a certain amount, I think it’s was in the thousands. If I over pay by £250 a month it doesn’t affect the month payment. It might be worth asking them what the trigger number is and then keep it slightly below that each time you ever over pay a larger amount

Also check whether it's 10% per calendar year or from the anniversary date of your mortgage - mine is calendar year.

I've had my mortgage for 6yrs and reduced the term from 25yrs down to 12yrs 🙌

With ours (Barclays) any ad-hoc payments up to 3x the monthly payment reduces the term, any payments above that (up to 10% in a year - which runs from when the mortgage was taken out) reduced the monthly payments. But they don't update the figures on the term that I can see on the app - I think that happens once a year (or maybe less). I had to have it all explained to me via a chat box with someone...

In my experience if you want the term to be reduced (always the smarter option) you need to contact your lender and they can do it manually. The default is to reduce the monthly payment. Give them a call and it can be sorted.

Im with NatWest and it says I can overpay by 20% per year, but if I overpay by £1,000 or more in a lump sum, they will recalculate the monthly payments instead of the term

Never over pay if you could get a savings account that pays more interest than your mortgage interest

Hi thanks all
i rang the natwest bank and spoke to the lady who says I will have to make an application to reduce the term if the application goes through then £35 pounds fee is to be paid , I am fine with that, when i asked if it will change my interest rate ( we are on 1.99 at present) she said it won’t. And I said thank u I will call back , she said it involves all sorts of payslips etc so don’t know what they will be looking for

then when i discussed with my husband he wondered if the term reduces then will our fixed tenure (4 more years left) also reduce i e then our current interest rate will finish sooner 😳 which we absolutely want to avoid!
don’t know if inshould keep my mouth shut and let it run the course but keep overpaying as much as I could in the next four years

There's usually a choice between reducing the term or the monthly figure. It is better to reduce the term to save on interest.

To maximize the benefits of overpaying you could save the amount you want to overpay in a high interest savings account. Barclays have one attached to current account over 5% as does nationwide and at one point Chase was over 6%.

They are not for huge amounts though. Mine is up to £5k and the rate after 5k is rubbish. As there's no penalty to withdraw I take the £25 each month from the interest is savings and pay it off the mortgage.

If you are planning to do it as a lump sum you could save in an ISA then overpay at the end of the year.

I am high rate tax payer so any interest I have to pay 40 percent tax and most savings account give max up to 4 percent only so it doesn’t look hugely advantageous to me to put in savings …isa s give no more than 3 percent at the moment and I’d rather overpay

No overpaying won't reduce the term or rate of your fix.

Yes that’s what I mean natwest seem to only give default option of reducing the monthly payment and not the term, the latter would be advantageous I think

If you're a higher rate tax payer with spare spends, it makes sense to top up your pension as you'll also get tax relief at the higher rate too, so £20k off your mortgage will be just that, whereas £20k into your pension will be £20k+ tax relief at the higher rate.

I'd do that instead of overpaying mortgage tbh while you're on a low interest rate - make your money work harder for you. Although obvs wouldn't be able to access it until minimum retirement age though....

Just another thing to consider!

If you are on a fixed term mortgage you need to make sure you don't finish before the end of the term as there are usually penalties.

Can't your lender just take a fixed overpayment per month?

I haven't formally altered my term as I took a 10 year fix. But I pay a fixed DD each month so even if the payment required decreases it still collects the same amount.

As long as I don't exceed three times the required monthly payment there's no penalty.

In terms of savings then if there's no penalty for withdrawals it may as well collect the interest and then go to the mortgage, it's only £25 but I don't have to do anything to earn it so every couple of months I scrape it off and chip a bit more from the mortgage.

Can you put savings in a spouse’s name, and are you definitely earning more than £500 in interest (which is tax free)? And is that ISA interest rate less than your mortgage interest rate?

I’ve increased my monthly payment with NatWest to add 20% to my monthly payment as an overpayment. Could you do this instead rather than making lump sum
payments?

Thanks I already pay lots into pension (thanks to employer contribution ) and may border on to breaching the annual 40k allowance ( thankfully this year they have increased to 60k so may be fine) also losing faith in how govt investing my pension and pension age is ever increasing so I am not sure if I will ever get to see any benefit from it , very nihilistic thinking from me but appreciate your thoughts

What I do in this scenario is set up a standing order to the mortgage account, same day as the mortgage direct debit is taken or there abouts for the difference... so in your case the £100. This keeps your payment the same, and results in an 'overpayment' building up which you can decide what to do with at a later date. In the meantime it is reducing your mortgage capital and thus the interest, as the interest is calculated on a daily basis of how much your loan is on that day. In the end the mortgage will end early if you've paid it all off, but if not it will just sit there... so I wouldn't worry about it - just keep overpaying. (Better perhaps to pay a lesser amount of overpayment each month than as a lump sum then they won't change the payment everytime! i think ours is £500 extra before they recalculate payments. )

As a pp said, the cut off for my mortgage with RBS (same bank as Natwest) was 999 to reduce the term and keep your payments the same. If you make a payment of 1000 or above, your repayments are recalculated to keep the term the same.
Just make sure you pay in installments of 999 to reduce the term.

Thanks all
i think I will just keep paying that 100 back into the mortgage as it is still within the 10 percent
some PP said to contact the bank when making the overpayment so I think I will do that next time I make lump sum to see what they say about reducing the term …appreciate all your responses
i feel psychologically better to see the huge debt coming down rather than in savings account purely based on how it feels rather than financial benefit

Oh i see, that makes sense the lady did say any payment over 1000 will trigger a recalculation so the trick is to keep it below 1000 👍 and then pay any lump sum if I can later in the year

Put it in an isa then you won't pay any tax on it...it would be daft to pay off your mortgage early when you can get more in savings than ur mortgage interest rate. Just chuck it all in savings and at the end of ur mortgage turn dump the Isa savings onto the mortgage balance

When you overpay you’ve got to tell them to keep the normal monthly payment the same or the overpayment will reduce your standard payment.

If you pay a lump off AND keep your monthly payment the same you will pay off the mortgage earlier and save loads of interest