Mortgage overpayment help - who no term reduction?

[beatmort]

Hello, First time mortgager here. I bought a house three months ago, and having a little extra money, thought I should overpay my mortgage. I checked with the overpayment calculator of my bank and it said there'll be a term reduction of x months on my mortgage and y amount saved in interest. Great, I thought, and paid in the money.

Now I see on the app that my capital has reduced accordingly, but not the term remaining, which is the same as before. I thought surely that means that monthly payments would come down? But I contacted them and they said this:

All overpayments go towards the capital balance and this reduces the interest paid, not the mortgage term. When there is a change to the mortgage, such as the rate, the repayments are recalculated over the remaining term. A new mortgage application would be required in order to reduce the term.

The monthly payments stay the same until there is a change to the mortgage or you request us to recalculate the payments. When your rate changes on xx/xx/xx, the repayments will be recalculated based on the overpayment, if they don't change before.

The calculator is based on your mortgage rate remaining the same for the full term of the mortgage. However, your rate will expire on xx/xx/xx.

It (keeping the same monthly payments) doesn't count as an overpayment and doesn't go towards the overpayment allowance. You would be paying off more capital by keeping the payments the same compared to recalculating but we can recalculate for you.

This is all Greek to me. I don't want a new mortgage application (the OG one was stressful enough). Is there any point to me overpaying then if nothing's going to change atm? So if I had overpaid this one day before my fixed rate expired, that'll still be the same result? Please help a clueless newbie.

You can ask them to recalculate (lower) the payments now. Or you can wait until the rate changes on xx/xx/xx and the payments will automatically lower.

Either way you will end up benefiting (in the sense that your total repayments will be smaller) and either way the term of the mortgage will not change, unless by separate agreement.

The longer you wait to recalculate the payments, the greater the eventual fall in repayments will be.

Alternatively, as it is with the same provider you might find that asking for a reduced term is not difficult at all.

I agree that it all seems different from what the website text suggested, but probably you can get what it says, you just need to ask for it.

I've found in the past that if we make relatively small repayments (those allowed during the initial period of the mortgage) then they change the rate not the term. But if we make larger repayments after the initial period but before the new agreement is reached, then we can reduce the term.

Thank you so much @pinkspeakers for your patient reply. They said the only way to reduce the term is to do a new mortgage application, which I don't want to do as my income went down for the last tax year (creative field so very normal). I didn't make a huge repayment, but it was 2.3% of the capital so not insignificant either. Your reply makes sense to me and you explained it in a much clearer way. Thank you and I hope you have a great evening.

My lender doesn't reduce the term without a huge phone interview but all my overpayments make a dent in the outstanding capital.

Either the monthly payment OR the term should reduce but neither are automatic for me

Who's your lender?

It's HSBC. Have you got yours to reduce the term with the huge phone interview?

check your contract/t&c usually when remortgaging usually you get options about reducing terms etc

You don't need to keep recalculating what the reduced term would be, in fact each time you do that the minimum payment will recalculate. Just keep overpaying as you are, every time you do that, a little more comes off the balance still owed, which means less interest from the next repayment, a little more off the balance owed etc etc.

So ultimately you will save on interest because you owe the bank less each month than originally anticipated, and even if you never reset the loan, you will pay if off earlier than the original term because you owe them less each month than originally anticipated.

when is your current product up? two years? on a 25 year mortgage?

just before the two years is up thwy will write to tell you their current products so you can choose another one. (or go elsewhere). at that point you can choose to pay over whatever term you want. they will quote you the 25-2=23 years but you can say 21 years. or 15 years or whatever you want. They will quote you accordingly on their website so you can see the difference.

I wouldn’t worry about the length of the mortgage - the overpayment you have made will reduce the amount you owe and the interest you are being charged. This is the main thing.

At some point you will remortgage, either to buy another house or take out a new interest rate or to move house. At that point you can look at the mortgage length.

It does not matter at this stage. Point is you overpaying and reducing capital.
At some point you will remortgage or move and it does not matter now if your term is 20 or 30.
When you move or remortgage you recalculate.

The term won't reduce, at the moment, as presumably you have taken out a 2 (or 3) year deal. As PP, when you come to remortgage in 2028, you can either pay a lower monthly amount or reduce the overall (from 25 years) term.

It is 100% worth overpaying your mortgage. Check if your interest is calculated daily, as if you had overpaid say £1,000, that money would have instead be accruing say 4% interest for 25 years.

It will just automatically reduce the term but officially leave it as is because what if you can’t always do the overpayment. If you change the terms your payment will increase permanently to suit the desired reduced term. You currently have flexibility

I find this very confusing, I was also told that we couldn’t reduce the term without a whole new application. We have been overpaying by £200 per month for the last 6 years and the overall balance is no different than it would be if we weren’t paying extra but the term has reduced by 7 months even though they told us we couldn’t reduce the term.

We won’t be staying for the duration of the mortgage which is another 13 years, the aim is to sell up in 4 years but will be be better off for overpaying - I’m so confused by it all!

Our monthly required payment has reduced as a result of overpayment. We've kept paying the same amount (+ overpayment) so that wheen our current deal ends in a couple of years we'll hopefully be able to reduced the term considerably without increasing our monthly payment.

This is very different from our morgage with Santander, when we overpay, it tells us how much the term will reduce by, and then if you look a day or two later you can see it's shorter.

They won't reduce the term of your current deal (2,3,5 or 10 years usually). When you come to remortgage, you can choose higher monthly payments and a shorter term, or lower for longer.
I originally had a 25 year mortgage. By overpaying, I paid it off early.

We are also with Santander but what does this mean if we exit the mortgage earlier - we are planning on selling up in 4 years. The balance isn’t going down any faster than if we weren’t overpaying but the term is - how does this benefit us if we sell before the end of the term. I’m sure this probably a stupid question ChatGPT can’t even answer for me!

Thank you but we aren’t going to remortgage - we are just planning on selling so how does that work?

Thanks!

@SeaGlassDreamer sorry I was aiming that comment at people who said the term wasn't reducing.

To be clearer (with our mortgage), if I overpay by , say, £1000 , and check back a couple of days later , the balance we owe will have gone down by £1000, and the term will have decreases by a couple of months.

The only way the term can decrease , if they monthly payment is staying the same, is if the overall balanced has reduced too.

If you overpay your mortgage will. Be laid off sooner and you will pay less overall interest.

The difference between what you want and what they are saying seems to be only a semantic one; you are only paying interest on the amount outstanding but they do not re-draft the agreement each time to give you an earlier end date.

When you exit the mortgage you will benefit because the amount left owing on your mortgage will be lower than if you hadn’t overpaid.

Every overpayment brings your balance down and reduces the interest that you owe.

At this point, the official time left on the mortgage is irrelevant, what matters is how much you owe.

Overpaying our mortgage meant they wrote to me with a lower payment schedule to which I said no. I kept it at the older, higher amount every month and overpaid more when and if I could. This naturally shortened the full term because the mortgage got paid off quicker than the 19 year term we had. There was no penalty for early completion.

They’re saying that your payments have been calculated based on a fixed rate. While your fixed rate product is likely to be for 2/5 years (whatever you signed up to), the repayments are calculated as though you were on that rate for the whole term (25/30 years). So until that fixed rate product expires, nothing changes. But once you are able to remortgage, your outstanding debt has been reduced by the overpayment you have made and your next mortgage can be negotiated on more favourable terms.

I found this confusing too because our first mortgage company took overpayments off the term remaining if we asked them to, our current mortgage provider does the same as yours and doesn't recalculate the term or our monthly payments.....so it is easy to think your overpayments aren't going anywhere.

But they are.....the power of our overpayments became clearer when our fixed term ended and we came to remortgage. Currently your overpayments are chipping away at the capital you owe, so each time you are paying slightly less interest and therefore your monthly mortgage payment is paying slightly more of the capital balance off rather than just servicing interest on the loan.

If you keep overpaying you'll naturally end up paying the mortgage off earlier as you will start to owe less and less and can recalculate the mortgage term if you like when you come to remortgage.

i wonder if your current company doesnt allocate the extra money to your account right away? you’d need to ask.

ps just as an aside, when remortgaging, never look at the apr rate to compare products if you continually get a two year or five year or whatever deal.

The apr rate is the two year + standard variable rate for that bank for the term, usually 25 years.

So if you never use the standard variable rate (preferring to switch to another fix after your current two year deal say) it will be irrelevant as youll never be on it.

Comparing the interest rate alone for the two year (or whatever) product is much more accurate for that period, so thats what you need to compare. not apr for somethimg you won’t use.

You don't need the term to change. The on-line mortgage calculators are telling you what the overall impact will be in the long term, if you overpay now. But the mortgage product you have is still the product you applied for (£200k for 30 years, for eg.)

You're best to overpay and just leave the term as is, because if your circs change and you can't afford to pay extra any more, then you can drop your payments back down to the minimum amount.

Look at it this way : Let's imagine you applied for a £200k mortgage for 30 years, with a fixed interest rate of 4.5%. Your monthly payments would be £1013. Even if you paid £1500 a month, the product that you applied for is still a 30 year mortgage at 4.5%. If you were on a variable rate, the term could be changing every 6 months (if Base rate was going up and down). It would be impossible for any computer to keep recalculating the term, every time you overpaid. No one could build a computer system that complicated, that the term was constantly recalculated!! Believe me, back in the 90's, I was on a team that built a computer system designed to calculate people's debts!

When your current deal ends in 2 or 5 years, you will have to pick a new mortgage deal. At this point, given that you have reduced the capital more than expected, you could shorten the term then, but I'd just keep it as is, for the reasons stated above.

I used to deal with mortgages.