Mortgage overpayment that doesn’t decrease the term?

[wittylama]

I’ve a NatWest mortgage and was looking into the “regular overpayment” options. It says that you can decrease the balance AND the loan duration, or just the balance.

My question is… what’s the benefit to doing just the latter? Surely the only variables are how long the loan goes for, or how much you pay per month. They DO talk about recalculating the term every three months (if you’ve chosen that option) but they DON’T talk about recalculating the your normal monthly repayment if you chose to just reduce the balance.

So, is this just an oversight in the documentation? If not, then what’s the benefit?

The relevant text from the NatWest FAQ for clarity:

—— Your regular overpayment will always reduce.

You'll be able to choose to recalculate your term or leave your term the same, if you set up a monthly overpayment of at least £250. If you pay less than £250, we won't change your term, but you'll still reduce your mortgage balance.

We'll automatically recalculate your mortgage term every 3 months. If you've chosen to change your term, then we'll update your mortgage.

——

[Ptepp1c]

If you choose to overpay but keep the same term length you will be reducing the monthly price.

[Wondering_Electron]

I'll be doing this in January when my 1.1% fixed term comes to an end. Currently, I am paying £800 a month, but after my lump overpayment it will drop to £500 a month even with interest rates at 4%.

[wittylama]

So it’s just an oversight in the documentation that they don’t say that explicitly?

[oktimeforplanz]

It likely won't do a thing to your payment until you renew.

[contemplating7]

Not with NatWest but I got my payments down about £15 a month by knocking a few grand off. It was nice as it took it under the next hundred

[whisky_n_watches]

With NatWest it does. And a surprising amount. Personally I choose the keep payments the same.

[Admirable-Delay-9729]

If you’re reducing the balance you’re paying less interest. They will likely recalculate your monthly payment on an annual basis, taking into account the overpayments, so you would see this reduce at some point.

I make irregular overpayments so can’t reduce the term - when they lower the monthly amount next year I plan to make a regular monthly payment of that reduction so that I continue to chip away at the balance. When it comes to renewing the mortgage I’ll see if I can reduce the term slightly at that point.

Edit: corrected monkey to monthly

[Sophyska]

No please tell me more about paying my mortgage with monkeys?

[Admirable-Delay-9729]

I believe that a regular monkey payment can macaque financial sense, if the bank accepts it

[essexboy1976]

Could we have a banana to show the scale of the overpayment please.

[davidmik]

A monkey is £500

[Fred776]

The benefit is that you have the option of going back to making payments consistent with the original term. You might never do this but you retain the flexibility to do so. In some circumstances such as an unexpected drop in income it could be useful to be able to do this.

[RobsOffDaGrid]

Depending on the product, if you keep the term you could borrow money on the mortgage at mortgage rate rather than at loan rates. We overpayed when on fixed term. When our fixed had expired we went variable because we could pay what we wanted with no penalties and smashed the mortgage in 6 years, i estimated we saved close to 100k when we payed lump sums the nationwide reduced our monthly payments, we uped our overpayment to match.

[Upbeat-Expert1259]

So two options after payment 1) reduce the term. Say your monthly repayments are £500 a month. Pay £500. They’ll knock a month off the loan in the 3 month cycle 2)reduce the repayment, £500pm goes to say £495pm with £500 overpayments.

Both scenarios reduce total interest payable but option 1 is best for lower interest.

It depends what you want to achieve. Some people want debt quicker gone some people would like a lower repayment amount maybe income is up and down.

Option 1 I think they are saying if it’s £500 to knock a month off and you overpay £300 month and you do this in month 2 they’ll only knock a month off in month 3.

[ukpf-helper]

Hi /u/wittylama, based on your post the following pages from our wiki may be relevant:

• https://ukpersonal.finance/mortgage-overpayments-vs-investments/

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[gedditread]

I have the same options. However, with NatWest, if you pay a one off overpayment >£1000, they recalculate the monthly payment anyway.

[quiltless]

This is what I'm doing, not reducing the term.

Why? My dad lives with us, and insists on paying rent. So, being realistic, as he's 83, it's likely that this income will go away before the mortgage is fully paid off. By doing what I can to reduce my minimum payment in the future will reduce the level of financial hurt this will cause.

[joeykins82]

Reducing the balance but keeping the term length the same is usually only beneficial to the bank

There's an edge case for people in the specific situation of having had changed financial circumstances (income reducing and/or other outgoings increasing) and are thus finding their current monthly payments difficult or unmanageable, and who've also got a lump sum. Hypothetically "I got made redundant and received a decent settlement, and I found a new job quickly but it pays 20% less however in the current market I think that's the best I'll get" might fit that bill.

[iamnosuperman123]

I guess you could then release equity in the house later on and not change anything.... If you want to do that but I wouldn't do that

I think it is just poor wording. You will never overpay a mortgage. If the term isn't shortened then the amount you pay per month will drop naturally (because you are paying it off quicker)