Overpaying mortgage question

A question about : Overpaying mortgage question

Hi all,

I'm on my first mortgage so please excuse this noob question! With the interest rate really low, I'm able to overpay my mortgage quite a bit and would like to do so. I'm with Nationwide, I can overpay up to 10% of my original mortgage amount each year. If I overpay more, there's a penalty.

Their website on overpayments states that if I overpay by Ј500 or more, they will reduce my monthly payments, unless I tell them to change my term instead. I definitely don't want to reduce the term, but ideally I don't want to reduce the monthly payments either! So instead I was considering just doing lots of overpayments of Ј499 each.

Now the question is, let's say I make all my allowed overpayments this month in Ј499 steps. This shouldn't reduce my monthly payments (as I understand it), but wouldn't that lead to me essentially overpaying more than my allowance in the next months? After all, the monthly payment is fixed and consists of paying interest as well as paying off some capital. Now that I've just reduced the balance of my mortgage, the monthly payment will pay off more capital... Will this then be counted toward my overpayments and incur a penalty?

Would be great if you could advise me on how best to overpay.
Thanks!

Best answers:

• no its 10% from may 2013 before that its Ј500 per month. Thats 10% of the inital mortgage you took with them in a calander year. Anything over Ј500 recalculates your monthly amount, anything below doesn't. They charge daily interest so if you can afford to pay in a lump sum rather than monthly you'll save pennies there as well.
• just pay in a lump sum, your interest is calculated daily, they can change your direct debit to what you were paying the amount changes. Its not costing you any money. I dont follow what you want to achieve by the 499.
• Hi there
  With nationwide you can give an instruction on Internet banking that overpayments should not reduce your term and that you do not want your monthly payments recalculated either. I make overpayments regularly of various amounts and my monthly payments stay the same.
  Flower
• Thanks for your reply, Flower. Do you ever overpay more than Ј500 in one go? Is your 'normal' bank account also with Nationwide? I'm just asking because my internet banking is with Santander, so how would I, when instructing them to make a transfer to Nationwide, specify that I don't want the monthly payments to go down? They don't have anything to do with my mortgage...
  I'm going to try and clarify my original question a bit more with an example here. Say I borrowed Ј100,000 at the start of the year as suggested by Thrugelmir. Let's say I pay 3% interest on this, then the mortgage calculator says that I'd pay Ј474 per month (25 years term). If I overpay my full Ј10,000 allowance for the year right at the start of the mortgage, then it should be essentially as if I had only borrowed Ј90,000. For a 25 year mortgage this should result in payments of Ј427 per month.
  If I can get Nationwide to NOT reduce my monthly payments despite making this big lump sum payment, I'd pay Ј47 more per month than I'd need to. Since interest is calculated daily, this would mean those Ј47 would go towards reducing my debt. If they let me do this without penalty, it would mean I could overpay almost Ј600 more per year!
  It depends a bit on how they define overpayments, I think. Obviously making any extra payments are overpayments. However, those monthly payments are collected by them by direct debit, so they're not really active overpayments, right..? So if I could get them to not reduce my monthly payments despite the Ј10,000 lump sum at the beginning, they effectively let me overpay Ј10,600 over the first year, despite the limit being 10% and not 10.6%!
  Please let me know whether this makes more sense now.
  Thanks!
• ok you have a mortgage of 100,000 then you can overpay to 10,000 per year without charge. You can't beat the system its done automatically.
  So if you pay 10,000 then keep your direct debit the same you are overpaying. However if you reduce the term going through the correct process and committing to a shorter term you can pretty much do as you say. But that would be actually reducing the term that would be the only way to do what you want to do; otherwise its just 10% of the 100k
• Hi there
  Yes my bank account is also with nationwide and we transfer payments from that account to the mortgage on internet banking.
  Can you view your mortgage on internet banking with nationwide?
  If you can then you can go into the mortgage account and click on the overpayment section on the left hand side.
  On that screen it you give your instructions of how you want any overpayments to affect your account.
  If you overpay by less than 500 they will not recalculate your monthly payments. For any payments above 500 you can choose whether to reduce your payment, term or neither.
  You are right that if you don't have your payment recalculated, more of your normal monthly payment will be paying off the capital but this is not classed as a further overpayment and does not form part of your 10%. It is not over your contractual monthly payment.
  Hope that helps.
  Flower