What happens when you over pay your mortgage?

Discussion in 'Mortgages and buying and selling homes' started by landlord, Aug 11, 2017 at 9:46 AM.

  1. landlord

    landlord Frequent Poster

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    Last edited: Aug 11, 2017 at 11:13 AM
    I recently had a large lump sum available to pay off a chunk of my home mortgage with B of S (1% tracker). I possibly could of done something more productive with this money but with my history of poor investments and low tolerance for risk I thought this was a sensible option.
    The default with B of S is to keep the term the same but reduce the monthly repayments. After a recent post by Brendan Burgess I can now see the logic in retaining the original term and overpaying.


    I am now able to overpay my B of S mortgage by approximately €1000 per month.
    B of S have told me that if you overpay by more than €1000 per month this will reduce the term. However if you overpay by less than €1000 per month their policy is that this will not reduce the term only the capital.
    Can someone explain exactly what they mean, how this would affect the monthly payments and if there is any advantage in overpaying by more than 1000 Euro/month. Thanks
     
    Last edited: Aug 11, 2017 at 11:13 AM
  2. Brendan Burgess

    Brendan Burgess Founder

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    That makes very little sense to me.

    I would suggest saving up the overpayments for 6 months and then making a one off capital repayment, and keeping the term the same.

    Brendan
     
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  3. RedOnion

    RedOnion Frequent Poster

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    What's your remaining balance and term?

    Also, the 1,000 distinction isn't mentioned in PTSB brochure on Flexible Mortgage Repayment Options.
     
  4. landlord

    landlord Frequent Poster

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    Term ends 20/3/37, balance after lump sum payment is 248,432. 1% tracker
    Very sorry I meant I have a bank of Scotland mortgage not PTSB. I have several mortgages I got mixed up. I will edit the original post.
     
  5. RedOnion

    RedOnion Frequent Poster

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    BOSI T&C's are that unless they agree otherwise, the repayment amount is recalculated on the basis that the term will remain the same. They only allow amounts over 1,000 to be partial early repayment. I'll send a link later if you can't find it.

    Separately, is this mortgage a BTL or on your PPR? I'm assuming you're repaying the most expensive (after tax) mortgage first.
     
  6. landlord

    landlord Frequent Poster

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    This is my PPR. My buy to let mortgages are all 0.75% above ECB.
    If you could send a link I would appreciate it. I still don't really understand the consequences of overpaying €999 monthly compared to €1000 + off this mortgage?
    Is my objective here to try to keep the term the same as Brendan has suggested and therefore limit my overpayment to less than €1000 per month. And if I do this will the overpayment be paying off the interest or the capital? Also will each overpayment I make result in a recalculation of the remaining capital and therefore bring down the following months repayment? Sorry still confused.
     
  7. Brendan Burgess

    Brendan Burgess Founder

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    Capital + interest = revised balance.

    When you make a payment, or an overpayment, it brings down this revised balance. And therefore saves you future interest.

    Yes, your objective is to keep the term as long as possible so that the contractual repayments are as low as possible. You can always pay more, but if you get into difficulty, you can stop overpaying.

    Yes, every overpayment should result in a reduced repayment the following month.

    Brendan
     
  8. RedOnion

    RedOnion Frequent Poster

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    BOSI terms are a little unusual. This is based on my interpretation of T&C's. I've no first hand experience with BOSI.

    An overpayment sits as a 'credit' on your account, until such time as you either request the overpayment to stop, request the term to reduce, or you use it up by taking payment holidays. If you can imagine the concept of negative arrears might make it understandable. However it does reduce the balance on which interest is charged.
    The next month's repayment is not automatically reduced, but the portion of interest is slightly less, do you pay the balance quicker.
    You can utilise overpayments to take future payment holidays, but you cannot redraw the funds.

    Note: this treatment is specific to BOSI. For example EBS do not reduce the interest accruing balance until the loan is rescheduled. For AIB any overpayment will reduce future repayments by default.

    The link below should provide more info. There's a section on early repayment.

    Link to terms: http://business.bankofscotland.co.uk/general/ireland/pdf/BOS-Home-Loans-TCs-0914.pdf
     
  9. RedOnion

    RedOnion Frequent Poster

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    I'd highly recommend using DrCalculator.com or downloading Karl's Mortgage Calculator if you want to play around with overpayments to see the effect.
     
  10. dub_nerd

    dub_nerd Frequent Poster

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    A mortgage is normally designed so that (assuming a constant interest rate) the regular payments remain the same throughout the life of the mortgage. The proportion of interest and principal in each payment varies (more interest in the early payments, more principal in the later payments) but the size of each payment stays the same. There are lots of other ways you could do it, but presumably the assumption is that the constant repayment amount suits the borrower.

    The upshot of this approach is that each time you make a payment the effect is the same as if you took out a new loan of the remaining principal amount for the remaining term. The payments would stay the same. Let's take an example:

    You borrow €100k over 20 years at 5%. The monthly payment works out at €660. After ten years you will have payed 120 x €660 = €79,200. But €16,980 of that was interest so you still have €37,780 principal remaining to pay. Now, if we calculate the monthly cost of a mortgage of €37,780 over 10 years at 5% we find that the monthly payment is €660 ... the same as €100k over 20 years. This is exactly what you'd expect, and no big surprise. It's true at any point in your mortgage.

    Now let's suppose after the first 10 years you start paying more than €660 per month and you do this at the same increased amount every month from then on. Clearly your mortgage is going to be paid off quicker. The only question is what way the bank treats this. There are two options:

    1) The bank treats your overpayment as a temporary phenomenon. They assume at some point you're going to go back to paying €660/month. So they take your overpayment and calculate a reduced term such that the remaining monthly repayment is always €660/month. If you keep overpaying, the term will keep reducing but the amount you are supposed to pay will always remain at €660 for whatever the remaining term is. It's like taking out a new mortgage each month for a shorter term.

    2) The bank keeps the term the same regardless of how much you pay. But because the principal outstanding is lower, the required payment each month is lower. It's like taking out a new mortgage each month for a lower amount.

    There is a pro and a con of each approach. If you reduce the term you will pay the least interest overall. It's always better to pay off a loan quicker if you want to pay the minimum interest. But under option 1 the bank still expects you to pay (at least) €660/month. If you got into trouble down the road, it would not stand to you that you overpaid early on. You would be treated as being in arrears and your credit rating would be affected.

    If instead you keep the same term but reduce the repayment amount, you pay more interest overall (but only if you actually drop the repayment amount eventually -- if you manage to keep up your higher payments until the end then the difference between options 1 and 2 is purely hypothetical). The advantage of this approach is, as has been said, you can take a reduced repayment amount in future if it suits you.
     
  11. landlord

    landlord Frequent Poster

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    I seem to remember a while back one could obtain a mortgage with a certain bank where the interest could be offset by funds in your current account (same bank). Is this a similar concept?

    So if I overpaid for example €800 per month on a 248,000 Euro mortgage, where the repayment was normally €1140 per month.

    Each month I would obtain an extra €800 credit towards my mortgage, which would just sit there (as if it were in a separate bank account). So this €800 would have no impact on the capital+interest = revised amount.
    The mortgage capital would remain the same ( although separately I would be accumulating this extra mortgage credit,).
    But the interest paid each month would be based on the remaining capital minus this extra mortgage credit and therefore reducing at a greater rate than normal.
    The revised amount in this case I guess would also stay the same.

    If I continued this 800 Euro payment indefinitely, then eventually the credit from this overpayment will equal the capital remaining, The mortgage will effectively have been paid off and the mortgage term will have been reduced.
     
  12. RedOnion

    RedOnion Frequent Poster

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    Something like that, the repayment isn't recalculated but the balances are netted. If you later missed a repayment you wouldn't go into arrears.

    That's my understanding of their T&C's.
     
  13. LS400

    LS400 Frequent Poster

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    My outlook on your original question is to reduce the term of the loan asap, but if I'm reading the post correctly, this is not allowed by your mortgage provider.

    Any extra funds I had went into reducing the capital amount, keeping the monthly repayments the same, avoiding any complications with fluctuations in the monthly repayment amount.

    The most important part of this to me was to get the monkey off the back earlier, even when it was on a tracker.
     
  14. landlord

    landlord Frequent Poster

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    My mortgage provider will allow me to reduce the term, however for reasons mentioned by other posters in this thread and by Brendan in a separate thread (I can't find the link to it at the moment), I have chosen instead to keep the term the same and overpay by standing order each month.
     
  15. Brendan Burgess

    Brendan Burgess Founder

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  16. landlord

    landlord Frequent Poster

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    Last edited: Aug 12, 2017 at 8:56 PM
    Just discovered Karl's mortgage calculator allows you to add in the overpayments to see what happens to the term.
    So by overpaying my E 248,000 1% mortgage by 800 a month it brought the term from 20 years left to approximately 11 years.....happy days. It's also nice to know about the payment holiday in case of emergency!!!! Thanks red onion !!
     
    Last edited: Aug 12, 2017 at 8:56 PM
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  17. RedOnion

    RedOnion Frequent Poster

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    I'd suggest you confirm what I've told you above with the lender before you go making any final decisions.
     
  18. landlord

    landlord Frequent Poster

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    A BofS member of staff is due to call me on Monday afternoon with various figures prepared and an explanation of how they are derived. At least I will be armed with a basic understanding. Thanks.