Extra money into mortgage

S

SirMille

Guest
Hi guys,

I have a mortgage with Ulster Bank.
I called them today, and asked if it would be possible to put extra money I have into the mortgage.

I was under the impression that it was a wise thing to do. But I want to put the extra money against the principal.

While on the phone to UB, the young lady said I could put the money against the balance.

Are we taking about the same thing?

If I'm putting extra money in, I want to reduce the amount owed.
I'm aware that the first twenty years of a mortgage are typically only servicing interest and
only​
near the end is the actual principal addressed.

Any guidance appreciated!
Dave
 
UB are right, there is only one balance which is made up of principal and interest. Every month the interest you owe is added on and the payment you make is taken off. When a mortgage is new the interest added each month is high and your payment covers that with a bit extra, the extra reduces the balance slightly so that the following month the interest is calculated on slightly lower balance and so on each month. Any extra payments made will reduce the balance owing resulting in less interest being charged, in general it is a good plan if you cant get higher investment rate than the mortgage rate you are paying.
 
When you provide them with the money you need to give in writing instructions that you wish for the amount to be taken from the principal/capital of the mortgage. Did the lady indicate what affect the payment would have on the term of the mortgage?
 
This is of interest to me as I have a tracker mortgage (21 year) with NIB.

I've started making occasional 'top-up' payments to this, when I do it I send NIB a letter confirming that this is to come directly off the principal amount borrowed, and I ask them to send me a statement showing the top-up payment, and the new amount outstanding.

I'm only in Year 1 of my repayments, and at times it feels like I'm barely moving the needle in terms of the overall amount, but every little helps !! And I'm doing it now as interest rates can only go in one direction and I am, like SirMille, a bit worried about what'll happen then.

I've also found a helpful calculator on the It's Your Money website which shows you how much you're shortening the term of the loan if you make either a once-off lump sum top-up, or regular additional payments. You key in the term of the loan, interest rate you're paying, amount borrowed, and then the amount of any extra payments. It's worth a look.

Molly
 
I agree with wbbs - you don't really need to ask for the payment to be taken off the principal - as long as your instruction states that you want the funds applied to the balance immediately, then it must come off the principal.

However, you should indicate whether you want your repayments to remain at the same amount (meaning the term of the loan becomes shorter) or whether you want the term to remain the same (meaning your monthly payments are less)
 
SirMille said:
Hi guys,

I'm aware that the first twenty years of a mortgage are typically only servicing interest and
only​
near the end is the actual principal addressed.
Click to expand...

All good advice given, but I want to address this point.
Every year of a mortgage, you pay interest and capital.
If you didn't pay off some capital every year, the mortgage would never get paid off.

However, the amount paid off the capital is smallest in the first years.

Karl Jeacles mortgage calculator shows a very useful graph to illustrate this.

http://www.drcalculator.com/mortgage/
 
If you make a once-off lump sum repayment, what else can it come off except the balance outstanding?

The balance goes up each month as interest is added, and goes down each month as you repay.

A lump-sum simple knocks it down faster.

And so reduces the term.

And so reduces the overall interest paid.
 
Protocol, I agree on the balance and the interest but the only thing you need to check is whether the term is adjusted or the repayment. I have made lump sum repayments to my mortgage and the repayments have been adjusted to keep the term constant - I then contacted the bank to ask them to return the payments to the original level and this was re-set at the next month's repayment. Different banks will have different policies on this
 
Ah yes. I assume most people would want their repayment to remain the same.

Ok, different banks = different policies.

Yes, confirm reduced term and same repayment.
 
Molly Bloom said:
This is of interest to me as I have a tracker mortgage (21 year) with NIB.

I've started making occasional 'top-up' payments to this, when I do it I send NIB a letter confirming that this is to come directly off the principal amount borrowed, and I ask them to send me a statement showing the top-up payment, and the new amount outstanding.

I'm only in Year 1 of my repayments, and at times it feels like I'm barely moving the needle in terms of the overall amount, but every little helps !! And I'm doing it now as interest rates can only go in one direction and I am, like SirMille, a bit worried about what'll happen then.

I've also found a helpful calculator on the It's Your Money website which shows you how much you're shortening the term of the loan if you make either a once-off lump sum top-up, or regular additional payments. You key in the term of the loan, interest rate you're paying, amount borrowed, and then the amount of any extra payments. It's worth a look.

Molly
Click to expand...

Is this the wisest course of action in your circumstances? If you've an LTV tracker with NIB, the applicable interest rate may be as low as 1.5%. That's the cheapest money you're ever likely to get. Given that deposit rates of 3.5% seem to be available (which is still 2.625% after DIRT), would it make more sense to invest the relevant funds rather than making mortgage overpayments?
 
Hi BazFitz

Thanks for that - you're right to flag it as an issue for consideration. I did think about topping up my savings, given that the mortgage 'top-up' payments I'm making aren't huge (so far this year around €5K in total).

However, I am facing a pay cut at work in the next month or so. My take-home pay will, I'm sure, be hit by increased tax after the Budget. The ECB will probably start raising rates in the next 12 - 18 months. All of which means I might not be able to make top-up payments going forward ...

I've given myself a target of taking 5% off the mortgage in 2010, and I'm nearly there. Psychologically it feels better to be chipping away at the mortgage as I do feel exposed because of the size of it.

Thanks again, Molly
 
If the ECB rate rises, deposit rates should too. Again, I'm open to correction but if you can get (say) 2.625% net of DIRT on deposits and your mortgage is at (say) 1.5% then it makes little sense to overpay in relation to the mortgage. And that's before any mortgage interest relief is accounted for (that should make the above "spread" even more favourable). Worst case scenario, you could use the savings you accumulate to pay down your mortgage at a later date. And given the present climate where credit is difficult to obtain, it may make sense to have your cash readily available (rather than tied up in the mortgage through overpayment).
 
Although it makes sense to put extra money on deposit rather than overpay the mortgage, this requires serious discipline if your real objective is to repay the mortgage early. You would be surprised how many people dip into the accumulated savings at the end of the year (holiday, Christmas, emergency) and do not put the full amount against the mortgage. At least with overpaying you are immediately reducing the mortgage balance.

[broken link removed]
 
I'm also thinking of paying off money off my mortgage. I have debated this in my head for a long time. I understand the whole think that my being on a tracker .5 above ECB that I am very lucky and that deposit interest rates are higher.
I'm beginning to think that I am better off paying down a lump sum now, as when rates rise it will make it easier and less interest will be applied as there is less capital. Also when they rise there is no guarantee that the deposit interest rates will.
 
niceoneted said:
I'm also thinking of paying off money off my mortgage. I have debated this in my head for a long time. I understand the whole think that my being on a tracker .5 above ECB that I am very lucky and that deposit interest rates are higher.
I'm beginning to think that I am better off paying down a lump sum now, as when rates rise it will make it easier and less interest will be applied as there is less capital. Also when they rise there is no guarantee that the deposit interest rates will.
Click to expand...

Rates will rise, that is inevitable. If you can afford it then why not start overpaying your mortgage now? You are currently paying 1.5% so try and pay the same amount as if your rate was 2.5% or even better 3.5%. You will immediately start eating into the capital amount and when interest rates rise you will already have a buffer so the increase in your mortgage repayments will not come as such a shock.
 
Thanks NorfBank. I have a lump sum that I can pay off so is it better to use the lump sum in one go or use the lump sum over time to make additional payments.
 
niceoneted said:
I'm also thinking of paying off money off my mortgage. I have debated this in my head for a long time. I understand the whole think that my being on a tracker .5 above ECB that I am very lucky and that deposit interest rates are higher.
I'm beginning to think that I am better off paying down a lump sum now, as when rates rise it will make it easier and less interest will be applied as there is less capital. Also when they rise there is no guarantee that the deposit interest rates will.
Click to expand...

Therefore, what you should do is keep your money on deposit for now, making the most of the deposit rate being historically high compared to the borrowing rate.

As soon as interest rates rise, and the deposit rate is no longer higher than the borrowing rate, pay the lump sum off the mortgage.
 
I thought about that huskerdu but would it not mean that I would get even more capital paid down before the rates rise as I will be paying even less interest and higher capital payments in my monthly payments. Whereas waiting for an alteration in rates may mean that the lump sum will only cancel out the increase in rates.
 
niceoneted said:
Thanks NorfBank. I have a lump sum that I can pay off so is it better to use the lump sum in one go or use the lump sum over time to make additional payments.
Click to expand...

Pay it off in one go if you are adamant that you want to pay it off now.

huskerdu's advice is spot on too though (once your deposits are secure). At least with the mortgage paid off you don't have to worry about whether your deposits are safe or not.
 
TRS and Top Up Payment

How does increased payments impact on your TRS? Asked UB and they said doubling the monthly payment would not impact on the TRS at all. In year 4 of FTB mortgage. Thx
 
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