Calculation possible?

Does "mortgage over 3 years" mean that (without the overpayments) the loan is expected to be paid off in 3 years, or does it mean it's longer-term than that, but for the first 3 years there is a ceiling on annual overpayments, which you want to exploit to the full?

Why do you want to make a standing order for the whole 36 months? Why not just note that in year 1 you may overpay by 20% of £45k, which is £9k, and thus make the monthly overpayments a twelfth of that (£750)?

Then, of course, you would need to amend the standing order downwards prior to month 13 and month 25, to take into account the new reduced balances of which you may overpay 20% in years 2 and 3.

On the other hand, the rules of your scheme may be more subtle. Instead of meaning that *in addition* to your normal payments you may make overpayments during the course of the year which total no more than

20% of the year's opening balance, it could instead mean that, based on your normal payments, there will be pre-determined end-of-year balance, and you must not make more overpayments than would cause the end of year balance to drop below 80% of that predetermined value. The calculation would be a little more interesting then, but not difficult. Need to know term length, by the way, in order to predetermine the end of year balance.

I knew I'd forgotten something! Its a 5 year term, 3 year fixed. I want to pay it off in 3 years by overpaying, but there's this 20% max overpayment by year clause that can only be paid in standing orders, so I just wanted to work out the optimum to overpay each month so I don't have to remember to re-adjust every year to the new 20% / 12 months value per month overpayment.

Hmm, I suppose you have got a point there - those two maximums are different, but I wonder by how much? I'll have to investigate the specific wording when I get a chance.

Thanks for the help.

I think you should make the effort to remember. With as short a term as 5 years, the balance 24 months in is going to be very much smaller than at the start, and therefore so will 20% of it. You'd be wasting a fair bit of repayment opportunity during the 2nd, and especially during the first, year.

On the other hand, let's run the calculation backwards and ask what your payments would have to be to shorten the term from 60 to 36 months. To repay £45k over 60 months at 4.99%/12 per month would involve monthly payments of £849. To repay over 36 months instead would cost about £1349 a month, which is a £500 overpayment per month, 12 times which is £6k, so that's well below the £9k (20% of £45k) limit.

But you're wasting 1/3 of your opportunity.

Now, in that scheme, the balance after year 1 would be down by a factor of (1-1.0499^-2)/(1-1.0499^-3) which is 0.68276, i.e. £30724, bringing your overpayment limit for year 2 to £6144, or £512 a month. So it would still be OK to keep the overpayments payments at £500.

But after year 2 the factor is (1-1.0499^-1)/(1-1.0499^-3) which is

0.34969, making the balance £15736, and the overpayment limit £3147 or £262 a month, so you're scuppered. Your objective of clearing the loan in 3 years using a 36-month-fixed SO is unachievable.

What, according to the rules, happens when your overpayments are too high? If they bring it to your attention, it won't matter if you've forgotten.

I know, I'm experimenting in methodologies at the moment and soon realised that. Its a shame there's no tools to work this stuff out easily. The best I'd found was

- which is very useful, but not quite what I need... Thanks very much for your calculations - that has given me more to think about. I have now emailed the nice lady at the mortgage company to see if she can come up with the best solution for me.

A 5% penalty. Ouch.

Out of interest - is it possible then to finish paying the mortgage off in 3 years by overpaying the full 20% on a flexible basis? ie, 750pm 1st year,

512pm, 2nd year and 262pm in the last year - does that work out to a 0 balance after 3 years? I just don't know where to begin to work these things out!

The above is wrong, by the way, Tim must be slacking not to have picked up on this. The factor should be (1-f^-12)/(1-f^-36) where f=1+0.0499/12, and I had short-handed f^-12 and f^-36 to F^-1 and F^-3 but written F as

1.0499 instead of the f^12=1.051057 it ought to have been. Head duly hung in shame for three whole seconds.

You need to be careful. The £512 figure for year 2 was based on overpaying £500pm in year 1, so if you actually overpay £750 in year 1, the year 2(3) limit will be a bit lower than £512(£262).

But the answer is yes, almost.

The monthly payments are P = An * r / (1 - f^-n) [1] Where An means "amount owing when there are still n months to go), and r is the monthly interest rate (in this case 0.0499/12), and f=1+r.

To work out the balance after 12 months, you solve [1] for An and plug in k instead of n, using k=n-12 (i.e. you work out the amount owing when there are 12 fewer months to go than there were originally.

Ak = P*(1-f^-k)/r [2]

and if you substitute the expression above for P, the 'r's cancel out and you get

Ak = An * (1-f^-k)/(1-f^-n) [3]

One more thing. To answer the question "if I start with A, and pay P per month, what will the balance be in 12 months' time?" you first need to work out how long it would take to pay off.

To do this, solve equation [1] for n:

(1-f^-n) = A * r/P f^-n = 1 - A*r/P log (f^-n) = log(1-A*r/P)

-n = log(1-Ar/P)/log(f) [4]

Then, and only then, can you use this n (and k=n-12) to work out a new balance using [2] or [3].

This is what I did earlier:

First use [1] to work out P for n`, which is £849. Then overpay the max £750, and this gives a new P of £1599, and if starting from £45k, [4] gives a new n of 30. Then use [3] to work out the end-of-year-1 balance, using n0 and k. That's £27669 which leads to a max monthly overpayment for year 2 of £461.

So, next step: P = £849+£461 = £1310. Use this and £27669 in [4] to get a new n of 22.15, so use a k of 10.15 to work out the year 2 end balance using [3]: I get a new balance of £12995 leading to max overpayments of £216 per month.

New P for year 3: £216+£849 = £1065. New n: 12.55

So there you go. Target *almost* reached, and the loan will be paid off about halfway through month 37.

You need to redo everything each time the interest rate changes, but if you're on a fixed rate, you'll be laughing.

Well, I dunno if that made you look like an absolute fecking genius, or me an absolute n*****ts, but as long as your calculations are correct (and I'm partially willing to stake my mortgage on it by sending off the forms tomorrow morning!), then whaddaya reckon I'll might need to save up for a lump sum to pay on the first day after the fixed rate has finished (ie the balance?). I'm too thick to even work that one out!

I'm asking this because this is the crux of whether I chose one mortgage over another. The other option is a fixed 3 year deal for 5 years at 5.38% with 500 fees (the 4.99% deal = no fees). But the 5.38% deal lets me pay off max of 500pm every month and all this time I've been trying to work out which option will cost me less when I've (hopefully) paid the mortgage in full in 3 years.

So far as I can follow, I'd be saving 1552.35 on the 4.99% deal if I pay

750 / 461 / 216pm in years 1/2/3 as you suggested (total over payment of 17124 vs 18000 on the 5.38% deal) - ie: 36 * 857.06 then 500pm overpayment + 500 fees = total payments of 49240.35 vs. 36 * 849.00 then 750 / 461 / 216 in years 1/2/3 overpayment and no fees 47688

= difference of 1552.35

Hope this is correct?! But then what was that you said about paying it off halfway through month 37 - how much?!!!

No need to save up, it would just be a partial normal monthly payment for the 37th month.

Well, it ought to be obvious that a 4.99% deal is better than a 5.38% deal even if the latter did not involve a £500 fee. Also as the latter limits the overpayments to £500, while the former allows them to go to £750 at least in the first year (it's better to repay as much as you can as early as you can, because overpayments in a way "earn" interest as though they were in a savings account paying untaxed interest at the mortgage loan rate).

What I meant was that at the monthly amount to which you switch at the boundary between year 2 and year 3, it would take 12.55 months to pay off. In other words, you should expect to make a 37th payment which would be a bit more than half of the 36th.

I guess that makes the difference just under £1k, so still worth it.

A-ha! I see, I see, been thinking about it all too much that its tied my brain a little. Or should that be tied my little brain?!

A big thanks for your help - most appreciated.

Ronald Raygun wrote: []

Hassle them to find out the *exact* rules, including when they calculate interest - I once persuaded a bank that paying 3-months mortgage in advance (they calculated interest on the average monthly balance and applied it quarterly) on /just/ the right date each quarter *did not* count as an overpayment.

rgds, Alan