I suppose the money overpayed on a monthly payment goes to paying the interest rather than the capital remaining which evens itself after a few years in the overpayer's favour, but I'm wondering if there are any mortgages out there that allow you to specify that overpayments paid should pay off the capital first? Or have I got this all completely wrong?!
Why would you suppose that?
Yes, you have it completely wrong.
With a normal repayment mortgage, the payments are cunningly calculated in such a way that you can think of the mortgage account operating like a savings account in reverse, with the balance outstanding growing from the moment just after one payment is made, up to the moment just before the next payment is made, by the interest which accrues during the intervening period on the balance outrstanding at the start of it, and with the payment being equal to this interest involved plus a certain amount of repayment of capital.
As a consequence, each subsequent balance outstanding will be slightly smaller, and so each payment (although constant) will involve a slightly smaller interest element and correspondingly larger capital element.
Also as a consequence, since each payment already covers more than the interest due for the period, any overpayment cannot help but eat into the capital remaining. All other things remaining equal, this will cause the loan to be paid off sooner.
Overpayments will go towards repaying the capital not the interest. But you need to know whether your mortgage (or the one you are intending to take out) has the interest calculated yearly or daily - or even monthly. If it's yearly, then the overpayments won't be noticed until the end of the year, in which case you'd be better to put the extra in a building society account and get a bit of interest. Check whether you have any penalties for repaying any part of the mortgage early, which is what you are trying to do. You need a flexible mortgage.
Rob Graham
It's a rather academic argument. On a standard repayment mortgage the interest is added to the capital at pre-determined intervals to arrive at a new debt figure. Any payment goes to reducing that debt figure which you can choose to think of as capital + interest if you wish.
Rgds
__ Richard Buttrey Grappenhall, Cheshire, UK __________________________
Its calculated daily.
Its a Nationwide fixed rate mortgage and seems very flexible.
So from what you all say, my overpayments will cause the balance outstanding to be re-adjusted from the next day and consequently my next normal payment will be more effective against paying off the capital (or outstanding balance - however you see it) more quickly by a small, but ever increasing fraction afterwards. I'd love an excel sheet to track this one out of interest - you could then really fine tune overpayments / underpayments to fit in with other factors (e.g., rising bills, like poxy Council Tax for example).
There is a Excel Loan template which is quite useful for tracking payments on a monthly basis, and the effect of lump sum payments.
I expect they will allow you to make overpayments of up to 10% p.a. without a penalty, but you need to check before you do it.
Yes.
Rob
In message , snipped-for-privacy@nospam.com writes
Then I think you'll be allowed £500/month overpayments without penalty. You can also "take back" your overpayments at any point in the future if need to. My annual Nationwide statement now gives this overpayment figure.
In message , snipped-for-privacy@nospam.com writes
I have a 'flexible', AKA 'Australian', mortgage that allows me to over pay if I wish to, I can also choose whether an overpayment reduces the term or reduces the monthly repayments. I reduce the monthly repayments and as I can have the excess repayments returned have, what I think is, effectively an untaxed savings account.
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