repayments off capital sum query..

Hi all, apologies if this has already been answered..We have a Tracker Mortgage and are in the position to overpay the monthly mortgage. If we direct the bank to maintain an overpayment of, lets say 150/month does it make a difference if we direct the bank to take the overpayment off the principal sum or not?ie would the 150 go towards interest payments unless specified by us, rather than towards the capital amount?

tia

Daithi

You're already paying the interest due in your normal payment. So it should go to reducing the capital. But be sure to direct the bank in writing to apply the overpayment to capital, on a monthly basis.

I have always overpaid my mortgage, but lately I have been putting any spare money into a high interest savings account instead. My reasoning is if I find things harder at some future stage my bank are still going to want their monthly payment.

If this happens by using this fund I can effectively either take a mortgage break for a time, or subsidise my payments for a longer time.

If I can continue to add to it and get through the current downturn without touching it, I can simply pay it off the mortgage at that stage.

This option might be worth considering in the current climate.

> If we direct the bank to maintain an overpayment of, lets say
> 150/month does it make a difference if we direct the bank to take the
> overpayment off the principal sum or not?ie would the 150 go towards
> interest payments unless specified by us, rather than towards the
> capital amount?

I've been overpaying by approx Eu350 since April 2007. But I think my bank are NOT taking it off the capital.
Last year (2008) for example I made total mortgage payments of approx Eu13700 (incl. these overpayments). Yet my capital was reduced by just 6,500 over that time, from 125k to 119k. This doesn't look like (12 X 350 = ) 4200 is coming off the capital on top of the regular capital reduction, does it?

My branch's mortgage adviser makes out he's never even heard of this "take repayments off capital vs. interest" issue when I raise it with him and says he can't give me anything in writing. I'm awaiting a fresh statement to study more carefully.

So my questions are,
1. Does it look like my payments are NOT coming off capital?
2. If so, how bad is this? i.e. what's the end result difference between 20 months overpaying 350 off mortgage vs. off capital at the end of a 20 year mortgage?
Thanks...
UB

Making accelerated capital repayments will reduce your total mortgage cost and effective term - significantly in many cases. See Karl Jeacle's mortgage calculator to estimate the possible cost savings. If you do go for an accelerated capital repayment strategy then put your instructions in writing and get written agreement from your lender that they will deduct additional overpayments off capital!

usrbin - your lender may not have been deducting additional payments off your capital. Many (most?) will not do this without explicit instructions!

Thanks Clubman, yes that's exactly what I was afraid of, my issue is though that, as I don't think the bank was deducting them off capital, now:

1. I want to know how bad this is, i.e. what's the approx net difference between a couple of years of overpaying a few hundred off capital versus a couple of years overpaying a few hundred off interest
and
2. The mortgage guy at my branch refuses to put anything in writing and doesn't seem to know what I'm talking about what I mention this distinction i.e. he says "look, it's ALL coming off capital". But I think the relatively small deduction in my capital over 2008 tells a different story.

usrbin said:

1. I want to know how bad this is, i.e. what's the approx net difference between a couple of years of overpaying a few hundred off capital versus a couple of years overpaying a few hundred off interest

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I don't understand this but I think it's moot anyway - if the lender did not deduct your "overpayments" from capital then they may simply have kept the money in your account doing nothing (unless you missed a repayment in which case the float would be dipped into).

2. The mortgage guy at my branch refuses to put anything in writing and doesn't seem to know what I'm talking about what I mention this distinction i.e. he says "look, it's ALL coming off capital". But I think the relatively small deduction in my capital over 2008 tells a different story.

Click to expand...

If he does not understand accelerated capital repayment on a variable rate mortgage then I suspect that he does not know much alright.

Your mortgage statement should clarify matters. If your "overpayments" did not go off capital then they should be reflected somewhere on the statement. If not then I really don't understand what's going on. Could you not put your queries (complaints?) in writing to the lender and bypass the guy you are dealing with? Did you ever agree with them that you were going to make accelerated capital repayments?

Good info and advice, cheers.

Looks like I'm misunderstanding something myself though... I was under the impression (from reading here on AAM) that overpayments could be taken off either (a) the mortgage capital, GOOD OR (b) the outstanding interest, NOT SO GOOD.

And I'm concerned because I think my lender has done (b). I never got anything in writing - what happened was I went in with my SSIA cheque, sat down with them and requested this be taken off the capital (which was done immediately and properly) and that monthly repayments continue at the same level pre-lump sum level, with the monthly overpayment coming off capital.

But when you say
> if the lender did not deduct your "overpayments" from capital then they
> may simply have kept the money in your account doing nothing
that gives me the impression that it isn't automatically (a) or (b).
But if so, what did you mean by this...
> your lender may not have been deducting additional payments off your capital. Many (most?) will not do this without explicit instructions!

In any event, you're right, the statement should be a big help. And I will try to bypass this guy in writing as you suggest, thanks.

I've tried Karl's mortgage calculator but it suggests that I should have seen my capital balance drop during 2008 by about TWICE of what it actually did. Which is what sent me scurrying here.

Cheers again!

Best to go over him and discuss with management I reckon usrbin.

While you are at this, I would recommend that you pay weekly if possible or fortnightly (which I am doing at present. As I understand it, you are chipping at the capital 26 a year as opposed to 12 times a year. This has very positive impact if you work it out over the life of the mortgage. e.g. in 5 years 60 times (12 x 5) versus 130 (26x5) times. Work out teh savings on Karl's calculator.

Let us know if bank agree to weekly payment, if BOI account

Be sure to specify as they could also reduce the term of the mortgage. i know first active were reducing the term of my mortgage as the ecb fell. i have a tracker mortgage. So i wrote to them specifying take decreases off capital sum.

smurf said:

While you are at this, I would recommend that you pay weekly if possible or fortnightly (which I am doing at present. As I understand it, you are chipping at the capital 26 a year as opposed to 12 times a year. This has very positive impact if you work it out over the life of the mortgage. e.g. in 5 years 60 times (12 x 5) versus 130 (26x5) times. Work out teh savings on Karl's calculator.

Let us know if bank agree to weekly payment, if BOI account

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Something I thought of recently. Im overpaying my mortage once a month with the normal payment.

I also sometimes lob ina few bob that I have spare from time to time. My interest is calculated daily and added to the principal monthly. If its calculated daily it makes sense to pay off any over payments immediately to reduce this daily interest charge......is this a correct assumption?

ClubMan said:

Making accelerated capital repayments will reduce your total mortgage cost and effective term - significantly in many cases. See Karl Jeacle's mortgage calculator to estimate the possible cost savings. If you do go for an accelerated capital repayment strategy then put your instructions in writing and get written agreement from your lender that they will deduct additional overpayments off capital!

usrbin - your lender may not have been deducting additional payments off your capital. Many (most?) will not do this without explicit instructions!

Click to expand...

Sorry for opening an old thread but I'm not clear on exactly what the distinction is between paying off the capital and paying off the interest.

We have a 30 year tracker mortgage and are currently over-paying into it each month. If we weren't over-paying we'd be paying off the monthly interest and enough of the capital (i.e. the amount we still actually owe) so that after 30 years the mortgage will be paid off. Grand.

But as we are paying extra each month, we are paying the monthly interest, enough of the capital so that it will be cleared after 30 years and then the extra so we are eating into the amount we actually owe (and reducing future interest as the amount we owe is less) - so we can reduce the mortgage from 30 years to something less or we can leave it at 30 years and make smaller monthly payments down the line. Grand.

So our extra payments are paying off the capital - right?

What would be happening if our extra payments were coming off interest? What interest? As we are paying the standard payment each month, we are paying off all the interest added to the mortgage that month anyway so there is no interest left to pay off as far as I can see. Once we pay our monthly mortgage we don't owe any interest to the bank - just the capital - right? And then next month interest is added to the account again - right?

Slightly confused - someone explain please!

you are correct in what you are saying,
i hae never understood the queries shall i instruct the bank to make overpaymetns off the capital or interest,
there is only one way to make lump sums and that is off the balance remaining which is the capital.

the only other way i think people will be getting muddled, is say you have a fixed or sv rate, and you make overpayments, maybe the bank will not let you pay the overpayments off the actual capital balance until it reaches a certain level, ie 5% of the mortgage balance, but for interest calculations the bank will take into account your overpayments every month, but this is the same as above as if you are paying less interest it means you are paying more capital, thus reducing your balance quicker thus reducing the term on the mortgage and thus reducing the amount of interest you pay ofver the lifetime of the mortgage.

dobbins said:

Sorry for opening an old thread but I'm not clear on exactly what the distinction is between paying off the capital and paying off the interest.

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There is no such thing as paying the extra off the interest, for the reasons that you have explained. The only way to over pay your mortgage is to pay the extra off the capital.

The reason why you have to specify this to your bank, is that some banks, if they receive an over payment with no instructions, leave the money in the account as a buffer in case of future non payments.
So the money will sit doing nothing.
You are advised to inform the bank that your overpayments are to
over pay the capital, just to be sure that they no this.

Thanks for the replies. Makes sense.

I use online banking to transfer the overpayment to my mortgage account and can see the outstanding balance dropping.

Very easy way to work this out (ball park)
Take your current capital outstanding, multiply by your current interest rate
(say 200,000 capital outstanding at 4% = 8,000 interest due every year)
If you are paying 1500 per month, this is 18,000 per year.
8,000 of this is towards your interest. That means that the other 10,000 is towards capital, and at the end of the year your 200,000 should be reduced to 190,000.

This is just a rough calculation but it should give you a good idea of the approximate reduction.