Difference between capital & interest/capital overpayments by UB

saccades

I’ve a tracker mortgage with the Ulster Bank and I’ve been overpaying for the last 8-9 years by 250 a month (~22K in total, about 9% of the original capital)).

Normally the wife looks after all the financial side of things but I noticed the annual statement and had a quick look and I’m confused about the figures.

It’s along the lines of:

Balance month 1 = 100,000
Payment = -1250 (98750)
Overpayment = -250 (98500)
Interest = +750 (99250)

Balance month 2 = 99,250
Payment = -1250 (98000)
Overpayment = -250 (97750)
Interest = +733 (98483)

Etc etc for the full year, there is no adjustment for the overpayments coming off the amount I originally borrowed (100K in this example).

Which suggests to me that the overpayments are coming off the Capital and interest, but I was positive that the overpayments should come off the capital only, thereby reducing your total payments. At least that’s how it was sold to me in the branch (and I was sure there was a leaflet saying the same too).

I queried this at the branch and after explaining the point I was making was told that the overpayments come off the whole lot (capital and interest) and it’s the overpayment that reduces the term, nothing to do with reducing the capital. So the statement is correct but I’m 99% sure it’s not what I agreed to when we started the overpayments.

However I asked for a letter to confirm this and got one telling me that the overpayments are from the capital…

It’s not a lot because the mortgage interest rates are so low but the difference is about 2-300 a year in my favour, but it’s a lot more if you take into account how much interest I could be earning on 20K per annum in a deposit account.

Is my understanding of capital wrong? Is there anyone else in the same boat?

I’m to be made redundant (and the wife too, which is nice) so I’m going to have to have a proper meeting and thrash this out
but it would be good to get some feedback/advice on this situation before I go in.

murphaph

Over payments can only come off the capital. The only option then is whether or not the over payment should reduce the term (capital amount reduces and will be cleared sooner than originally planned) or reduce the monthly mortgage payment (mortgage still runs to originally planned term but by the end the payments will be tiny).

Reducing the capital and maintaining the payments at the current level saves more and that is what is happening in your example. If you're about to be made redundant however and there is no sign of a replacement job, then you do have a decision to make. If you will have difficulty meeting the current payment then it may make sense to immediately cease the capital reduction and instead allow over payments to instead reduce your payments.

You say "there is no adjustment for the overpayments coming off the amount I originally borrowed (100K in this example)" but there is, it's just that you are being charged interest on the reduced amount which pushes the total balance back up towards the 100k.

saccades

I’m not sure I explained myself correctly. Does the money I pay come off the capital i.e. the 100K I borrowed or does it come off the capital and interest i.e. 100K plus 20 years interest @ 2% say?


A) 2% on 100K over 20 years sees me paying the bank 140K in total, my overpayments of 3k per annum will knock 3 years off this because I’m paying the 140K faster.

However if my 3k per annum overpayments are coming off the 100K (capital) by year 10 my capital that I would be paying interest on for the remainder of the mortgage at that point would be 70K. So a 30% reduction on my interest payments half way through the mortgage.

I was sure when we started the overpayment that it was example B, but your saying it’s A. That’s why I wanted clarification on if overpayment goes off capital (the money borrowed) or capital plus interest (total money owed). I’d be earning more with the over payments in a high interest account if A is the case.

The adjustment I was on about is that if at the end of the year that with example B the amount of money interest would be owned on would be 97K for 19 years (actually it should go month by month) if I stopped overpaying.

I hope that makes sense.

phormium

All payments come off the overall total, there is not two separate figures one of capital and one of interest. You borrow 100k for example, interest is charged at the beginning of month based on the amount outstanding each day of the month, total is then 100k plus interest, payment becomes due some stage in the month and this is taken off the total, start of next month it starts all over again with interest on and payment off.

That is the actual situation, statements or computer record in bank may show different figures for overpayments, arrears etc, these notional figures are based on where you are in relation to the agreed repayment schedule. You may be ahead and have a pre paid credit on the account which you can use to withdraw again or officially have it amalgamated into the loan figures so that your repayment or term can then be altered.

Either way it is much the same thing, pay extra and loan will finish earlier. Any payments made are taken into account each night when the interest is charged so you are benefitting from the extra payments.

saccades

Ah, so my understanding was wrong then.

Many thanks for your clarification, now to see how much of my mortgage I can pay off in a lump sum without being penalised and if I can get a reduction on the amount owing (11 years to pay off as opposed to 20) if I clear it all off, what do you reckon my chances are.


slim to none I would imagine.

phormium

You can pay off a lump sum without any penalty if you are on a variable rate.

If you mean can you get them to give a few bob off if you agree to clear the whole mortgage then the answer is not a hope

If you intend continuing to overpay then just keep paying the extra without officially reducing the term, then if for any reason in the future things are not as good as they are now you will be able to drop back to the original repayment amount without any hassle and without asking for any favours from them. The loan will still finish in the shorter period if you continue the over payments, you don't need to make it official.

saccades

I'm on a tracker - .95% above ECB, which is nice.

Not too sure on plans with both of us being out of work, the redundency payouts will cover the remaining mortgage so we'll probably look to move closer to dublin to reduce commute times and rent out the house.

Going to see what options are open to us, rent out the current house and move the mortgage to another property would be nice but I can't see the bank liking that.