Mortgage Overpayments advice

Could anyone give me some advice about mortgages and overpayments?. If I had a mortgage that was part repayment and part interest only (endowment) at the same SVR Interest rate, and with no penalties, from an interest point of view would I be financially better off by making over payments against the repayment or interest only part of the mortgage? Would appreciate any advice? Thanks

26 Comments

Banned

sorry, dont know if its me or your opening post but it doesnt read well

if you have low interest rates on a mortgage and higher interest on savings, then its better to stash it in a high interst account

I overpay on mine and it vastly reduce the term, but mine was a repayment mortage. If you paid off the repayment part early then the endownment side would not reach maturity and not pay out what you are lookig for. I would give youre mortage company a ring.

Original Poster

I have now paid the endowment off now but was advised previouslywhen I had both types to overpay on the repayment element, however the Building Society ignored my wishes and split the money over the two elements, pro-rata and I was wondering if I would be worse off financially? Problem is, with the information they give you, its hard to tell and if you ring and ask they always say they will respond to your question in writing within seven days and never answer the question you asked.

harmony999

I have now paid the endowment off now but was advised previouslywhen I … I have now paid the endowment off now but was advised previouslywhen I had both types to overpay on the repayment element, however the Building Society ignored my wishes and split the money over the two elements, pro-rata and I was wondering if I would be worse off financially? Problem is, with the information they give you, its hard to tell and if you ring and ask they always say they will respond to your question in writing within seven days and never answer the question you asked.



Go into the branch and ask to speak to the mortage advisor. Sounds a bit complicated to me. Good luck with getting it sorted.

Banned

i would say be glad you are rid of the endowment side, i detest endowments and can't blieve they are still being sold

Original Poster

Well it was good to be rid of the endowment but there was a very large shortfall. I paid £20k in overpayments as well this year and with them splitting this over the repayment and interest only parts, against my instruction I am just trying to understand whhether I have paid more interest in the last year because they didn't take it all off of the repayment element which I was advised was the best option.

Banned

you really need to discuaa it with them, if your saying you paid 10 grand off repayment and 10 grand off endowment then nobody is going to be able to help you with just this information

Not sure that I follow this either, but in general a mortgage is a debt and it is always better to get rid of debts before building up savings. That is because debt interest (over time) is greater than the interest you gain from savings - even in high interest accounts.

If you can take advantage of the low interest rates in your mortgage then pile in as much cash as you can afford because the interest rate will be going up next year.

To see the effect of overpayments on your mortgage use this Calculator

I'm no expert, but I would've assumed that any payments would just come off your mortgage amount. ie you owe £100,000 then you're currently paying interest on £100,000 and the mortgage will last 20 years for example. But if you overpay then you only owe £80,000 for example and you'll only pay interest on the £80k and your mortgage may now be 15 years.

I can't see how it would make any difference, unless you had 2 sums, 50k each for example, that were at different interest rates, in which case you'd want to pay off the higher interest one (assuming steady rates), assuming that your bank would allow that.

You may be better off saving the money, ie my mortgage is at 1.5%, I could get better savings than that even after tax. So I save rather than decrease mortgage. That has the added bonus of being available for emergencies.

Original Poster

Yes I wondered whether it would be the same but was not sure what the impact of paying the capital down would be. and don't know whether the interest only loan interest would be calculated on a daily rate. Sounds as though I need to speak with the Building society again but when I ring they never answer my questions and just send me meaningless facts through the post.

Banned

harmony999

Yes I wondered whether it would be the same but was not sure what the … Yes I wondered whether it would be the same but was not sure what the impact of paying the capital down would be. and don't know whether the interest only loan interest would be calculated on a daily rate. Sounds as though I need to speak with the Building society again but when I ring they never answer my questions and just send me meaningless facts through the post.



thats because the dont know, everything is done by computer, when i queried something on mine they didnt have a clue and went in branch and neither did they, you may as well spend hours trying to work it out yourself

harmony999

Well it was good to be rid of the endowment but there was a very large … Well it was good to be rid of the endowment but there was a very large shortfall. I paid £20k in overpayments as well this year and with them splitting this over the repayment and interest only parts, against my instruction I am just trying to understand whhether I have paid more interest in the last year because they didn't take it all off of the repayment element which I was advised was the best option.



If they have ignored your instructions, your best bet is to write a fully detailed complaint letter (find out the name of the head of department, not just a floor manager, and address it to them) and enclose any proof you can of what your instructions were. Get some proper advice and try and find out if/how much their mistake has cost you and state this in your letter, and say that you want them to rectify their mistake and pay this amount off the repayment part of your mortgage.

If they're still wishy washy and messing you around or not giving you straight answers, or even tell you they're not going to pay up, advise them that you'll be taking it further with the financial ombudsman and then contact them and give them all the details and they'll investigate it for you

financial-ombudsman.org.uk/con…htm

I don't get how (if you overpaid £20k), this money could have done anything other than come off the balance and save you money. Whether it's interest only or repayment should make no difference. It'd still bring your amount of interest you're paying down by the same amount, (repayment structure may change a little though).
Edited by: "Benjimoron" 28th Oct 2010

Banned

Benjimoron

I don't get how (if you overpaid £20k), this money could have done … I don't get how (if you overpaid £20k), this money could have done anything other than come off the balance and save you money. Whether it's interest only or repayment should make no difference. It'd still being your amount of interest you're paying down by the same amount, (repayment structure may change a little though).



i think the op did not want to pay off the endowment 1st, thinking that would be covered when policy matured, meaning maybe he would be now mortgage free (except a small amount in interest only) so to speak as in no more payments till maturity of said policy, where as now he still has mortgage repayments and interest to meet
Edited by: "sassie" 29th Oct 2010

Banned

sassie

if you have low interest rates on a mortgage and higher interest on … if you have low interest rates on a mortgage and higher interest on savings, then its better to stash it in a high interst account



That bits wrong depending on the size of the savings, if you have £100,000 mortgage, £10,000 savings....5% of £100,000 is more than 5% of £10,000

Benjimoron

I don't get how (if you overpaid £20k), this money could have done … I don't get how (if you overpaid £20k), this money could have done anything other than come off the balance and save you money. Whether it's interest only or repayment should make no difference. It'd still being your amount of interest you're paying down by the same amount, (repayment structure may change a little though).



Not entirely true - Lets assume his mortgage was £200k, split with £100k interest only and £100k repayment. He's paying interest on the full £100k and as the balance never decreases, the amount of interest he pays won't change. When he's making payments to the repayment part of the £100k, each month, every month he'll be paying ever so slightly less interest, as some of the capital has been repaid, therefore the amount of interest he's being charged on the repayment part will decrease ever so slightly with each monthly payment.

It's because of the split in how the funds are allocated in the repayment part that someone needs to calculate whether he's lost out or not by them not following his instructions. I'm sure we're not talking huge figures, but his lender should at least give him the courtesy of correcting their mistake and dealing with his complaint appropriately. Unfortunately, some lenders avoid dealing with cases where a human brain needs using until you threaten them with the ombudsman!

Banned

lumoruk

That bits wrong depending on the size of the savings, if you have … That bits wrong depending on the size of the savings, if you have £100,000 mortgage, £10,000 savings....5% of £100,000 is more than 5% of £10,000


you wanna have a little think

Edited by: "sassie" 29th Oct 2010

Original Poster

Thanks everyone for the advice you have provided.

Banned

sassie

you wanna have a little think



okay 5% of £100,000 is more than 10% of £10,000

better?

Banned

saving £10k into a bank paying your 10% = £1k
mortgage !00k - pay 10 k off, leaves 90k, saving you you 5% interest between those two figures so £500, and of course you couldnt pull it back out should you need it

lumoruk

That bits wrong depending on the size of the savings, if you have … That bits wrong depending on the size of the savings, if you have £100,000 mortgage, £10,000 savings....5% of £100,000 is more than 5% of £10,000



Sassie is right. The bit in bold is where you're going wrong. You're calculating that rate on the whole mortgage, where you should be calculating it on the overpayment. ie the figure in bold should be £10k.

So it's the same, apart from the savings would be taxed.

CharlieandLola

Not entirely true - Lets assume his mortgage was £200k, split with £100k i … Not entirely true - Lets assume his mortgage was £200k, split with £100k interest only and £100k repayment. He's paying interest on the full £100k and as the balance never decreases, the amount of interest he pays won't change. When he's making payments to the repayment part of the £100k, each month, every month he'll be paying ever so slightly less interest, as some of the capital has been repaid, therefore the amount of interest he's being charged on the repayment part will decrease ever so slightly with each monthly payment.It's because of the split in how the funds are allocated in the repayment part that someone needs to calculate whether he's lost out or not by them not following his instructions. I'm sure we're not talking huge figures, but his lender should at least give him the courtesy of correcting their mistake and dealing with his complaint appropriately. Unfortunately, some lenders avoid dealing with cases where a human brain needs using until you threaten them with the ombudsman!




Well surely, technically, he's paying interest on the whole lot. Repayment still has interest on it! Therefore whether he pays it off interest only, or repayment will still bring the balance down, meaning he's paying less interest. The same amount less interest whether it goes on either side (assuming they're on the same interest rate), (repayment schedule may change slightly).

Like I said, I'm no expert, but maybe why the bank can't answer is because it doesn't exactly make sense, paying off the balance will save you the same interest, whether it's put on one side or the other side (assuming they're on the same interest rate), (repayment schedule may change slightly).

Benjimoron

Well surely, technically, he's paying interest on the whole lot. … Well surely, technically, he's paying interest on the whole lot. Repayment still has interest on it! Therefore whether he pays it off interest only, or repayment will still bring the balance down, meaning he's paying less interest. The same amount less interest whether it goes on either side (assuming they're on the same interest rate), (repayment schedule may change slightly).Like I said, I'm no expert, but maybe why the bank can't answer is because it doesn't exactly make sense, paying off the balance will save you the same interest, whether it's put on one side or the other side (assuming they're on the same interest rate), (repayment schedule may change slightly).



Nope, the amount of interest paid on the repayment side does change after each payment, even though it's only by a slight amount. Going back to the theoretical £100k balance, say a payment of £600 reduced the capital by £10, interest for next month is then charged on £99,990k and not on the previous £100k. The total difference after properly calculating might not be a massive amount, but there will be a difference. Before I had the kids, I was a mortgage advisor and in the office had to deal with things like these fairly often. Time consuming to work out, but I'd imagine that's why he can't get a straight answer until he asks to take the complaint to a higher level.

Well of course, but if there's a seperate £100k interest only portion, then the £10 overpayment that you've put (I thought we were talking big numbers), would have exactly the same effect, the interest would then be calculated on the new lower balance.

How can that be wrong?

In theory, what you're saying sounds correct, but in practice it actually doesn't work like that. I can only assume that it's all down to when the monthly payment is split between the capital and interest on the repayment side and the re-calculation and same process over the next payments. A mistake was made on a customers account and the only way it could be rectified was by having a mock mortgage account opened up, completely mirroring the customers account, then having someone sit there and manually input the payments how they should have been made and writing down the interest and capital splits for each month, but they had to do it for 3 years worth of payments !!
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