Overpaying mortgage

VonLuck

This may seem like a basic question, but would appreciate some guidance.

Hypothetical scenario. If I have a €200k mortgage, say 5 year fixed at 2.65%, repayments €805 approx. I've estimated the interest payments would be maybe around €450 to start and decreasing as the years go on.

Bank states that 10% overpayment of the mortgage balance is permitted. Let's say that I increase the repayments to €1000 (which would be less than 10% of the mortgage balance over 5 years). Does this have any effect on the interest paid initially seeing as you are reducing the capital to be paid off by an additional €195 every month?

I hope I'm making sense. Just trying to figure out if it's best to overpay a mortgage earlier and reduce interest payments at the initial stages or else invest the money I would have used for overpaying into something else.

If it is the case that interest payments would reduce, how would I calculate what they would be?

hmmm

With most banks you can choose whether the overpayment should reduce the term (e.g. pay the loan off a few years earlier but keeping the same monthly repayment) or reduce the monthly repayment itself, but keeping the term the same. Best to ask them directly.

There's a few "amortisation calculators" on the web which will help you produce a repayment schedule.

NoviGlitzko

Find an accountant who your family or extended family trusts - ask them for advice mate.

kippy

VonLuck wrote: »

This may seem like a basic question, but would appreciate some guidance.

Hypothetical scenario. If I have a €200k mortgage, say 5 year fixed at 2.65%, repayments €805 approx. I've estimated the interest payments would be maybe around €450 to start and decreasing as the years go on.

Bank states that 10% overpayment of the mortgage balance is permitted. Let's say that I increase the repayments to €1000 (which would be less than 10% of the mortgage balance over 5 years). Does this have any effect on the interest paid initially seeing as you are reducing the capital to be paid off by an additional €195 every month?

I hope I'm making sense. Just trying to figure out if it's best to overpay a mortgage earlier and reduce interest payments at the initial stages or else invest the money I would have used for overpaying into something else.

If it is the case that interest payments would reduce, how would I calculate what they would be?

Decent calculator here:
https://m.drcalculator.com/mortgage/
But it may be worth getting some independent advise on how best to use your finances.

cruizer101

Overpaying early in a mortgage can significantly reduce the amount of interest you pay. On my own mortgage I overpay by 400 a month and in a year that has saved 5,424.

Are you better to overpay or invest elsewhere? Very hard to say for certain.
One thing to consider is overpaying on a mortgage is equivalent to putting the same money into a saving account giving the same interest rate as your mortgage. So any alternative should give you a better rate of return than that. A lot of investments might have the potential to do that but they are not necessarily guaranteed.

Depending on circumstances paying into a pension plan can be one of the best investments purely from the point of view of you get to pay it before tax.

Klonker

Usually when the banks say you can overpay by 10%, they mean of your monthly mortgage payment. So in your example you could overpay by €80.50 (805.00 * 10%). I'd double check that if I was you.

How overpayment works is at first you will pay the same interest ((200k * 2.85%)/12(monthly interest))). But because you are paying 10‰ extra, this will reduce the principal by more than if you didn't pay the extra. Then the next month when the interest portion of payment is to be calculated on the outstanding principal, this will be smaller as there is less principal remaining. Your mortgage payment will remain same meaning you will pay more principal and less interest every month and paying an extra 10% will speed this up.

Hope that makes sense, I'm not the best at explaining.

VonLuck

Klonker wrote: »

Usually when the banks say you can overpay by 10%, they mean of your monthly mortgage payment. So in your example you could overpay by €80.50 (805.00 * 10%). I'd double check that if I was you.

I read generally that it was 10% of the balance, but I will certainly look into it.

Reading the terms on KBC's website they say the following:

"The Borrower is entitled to make payments in excess of those required under the terms of the agreement however if an overpayment is made during a Fixed Rate Period a break funding fee, calculated in accordance with the formula set out in the statutory warnings section of this letter of offer, may be payable".

By the sounds of it, I will be charged for overpayments during the fixed period, but the phrase "may be payable" leaves it a bit vague. There is no other mention of it in the terms, so I will have to investigate further.

The only reason I'm querying this is that I'm trying to figure out if it's better to overpay my mortgage or else put this cash into a savings/investment account. Essentially I would have to earn greater than 2.65% after tax for saving/investing to be a better option base on the example in my original post. Am I right in saying this? Sounds like this would be hard to achieve.

Its 10% of the balance.

danoriordan1402

I thought about overpaying my mortgage for a while, but then I realised that since I am in a 1.1% tracker its more beneficial to dump the extra into my Pension, which is what I did with AVC's. Anything extra then I put in credit union account.

jayjay2010

OP all the banks have their own rules when it comes to overpaying, however I found that you have to be very careful when you overpay and make sure that it is clear where your money is going. I've had issues with PTSB and my friend with BOI.

When you call the banks, the call agents are usually not sure of the overpayment rules either. I had to speak to 4 different agents on 4 different occasions to get the correct information.

The interest savings can be huge when you overpay. Even an extra €50/€100 per month can be very significant in the long run.

When I make overpayments, I always ask for the term to be reduced. I want to pay my mortgage off early. However you will have the option to instead reduce the monthly installment amount, which doesn't save you as much interest in the long run.

The overpay vs invest debate is one to consider. My strategy is to do both: make some overpayments and invest some. That way I can benefit from both options.

lau1247

jayjay2010 wrote: »

When I make overpayments, I always ask for the term to be reduced. I want to pay my mortgage off early. However you will have the option to instead reduce the monthly installment amount, which doesn't save you as much interest in the long run.

Assuming that you maintain the same amount of monthly payment (including the overpayment portion) throughout, I believe they both come out the same in the end.

Reducing basic monthly amount is the better option because it give you flexibility. Come the time you need it. Reduced term may not be increased again but reducing monthly repayment still allow you to make overpayment.

The most important thing is to maintain the same amount of payment (plus overpayment) such that the monthly amount is the same as before irrespective of the new basic monthly amount. Then you are comparing apple to apple

ldy4mxonucwsq6

VonLuck wrote: »

This may seem like a basic question, but would appreciate some guidance.

Hypothetical scenario. If I have a €200k mortgage, say 5 year fixed at 2.65%, repayments €805 approx. I've estimated the interest payments would be maybe around €450 to start and decreasing as the years go on.

Bank states that 10% overpayment of the mortgage balance is permitted. Let's say that I increase the repayments to €1000 (which would be less than 10% of the mortgage balance over 5 years). Does this have any effect on the interest paid initially seeing as you are reducing the capital to be paid off by an additional €195 every month?

I hope I'm making sense. Just trying to figure out if it's best to overpay a mortgage earlier and reduce interest payments at the initial stages or else invest the money I would have used for overpaying into something else.

If it is the case that interest payments would reduce, how would I calculate what they would be?

It's not retrospective in terms of interest on the initial higher capital balance.

I overpay mine by the max 10% of the monthly repayment allowed (bear in mind its usually max 10% of the Monthly payment for fixed rate mortgage) and its paid off the capital meaning the interest I pay in future will be on an ever decreasing capital figure (which is decreasing faster due to the overpayment).

Some banks have overpayment calculators on their website which shows a good indication of how much you will save in interest by making your overpayment and how much your overall term will be reduced by.

In my case I was about midway through the mortgage before I started making overpayments but will shave about 2 years off the overall term and save approx 6k-7k in interest.

Based on your example a 200k mortgage over 20 years at a fixed rate of 2.65% if you overpay by the max allowed then you're probably looking at taking about just over 2 years off the term and saving 6k+ in interest.

This is handy for rough indication https://personalbanking.bankofireland.com/borrow/mortgages/calculators/overpayments-calculator/

awec

jayjay2010 wrote: »

OP all the banks have their own rules when it comes to overpaying, however I found that you have to be very careful when you overpay and make sure that it is clear where your money is going. I've had issues with PTSB and my friend with BOI.

When you call the banks, the call agents are usually not sure of the overpayment rules either. I had to speak to 4 different agents on 4 different occasions to get the correct information.

The interest savings can be huge when you overpay. Even an extra €50/€100 per month can be very significant in the long run.

When I make overpayments, I always ask for the term to be reduced. I want to pay my mortgage off early. However you will have the option to instead reduce the monthly installment amount, which doesn't save you as much interest in the long run.

The overpay vs invest debate is one to consider. My strategy is to do both: make some overpayments and invest some. That way I can benefit from both options.

This is not true. The saving is exactly the same, but reducing the mandatory payment vs reducing the term is much safer.

I cannot think of a single advantage to reducing the term when overpaying a mortgage.

Sparkey84

i consider myself fairly up to date on interest rates and my financial plans, that said i did consult with with a financial advisor when in this situation.

i based decisions on two basic calculations which i will replicate here. (different figures same scale)

1. €800 off mortgage pm. €200 pm into savings.
end of mortgage term year 2040 i would have savings of X amount.



2 €1000 off mortgage until it ends, much earlier. then €1000pm into savings until 2040 anyway. i would at the same point in time have savings of X and nearly 80% more again.

the last euro you pay off your morgage is the one you have had to pay interest of 2.6% on 30 - 40 times

there is really good loan calculator apps on play store. fiddle around with them to explore. but don't make the mistake of thinking 25% extra per month is 25% off my term. it would be a lot more off term than that.

ldy4mxonucwsq6

awec wrote: »

This is not true. The saving is exactly the same, but reducing the mandatory payment vs reducing the term is much safer.

I cannot think of a single advantage to reducing the term when overpaying a mortgage.

Far as I can tell overpaying the mortgage (by increasing your monthly repayment) reduces the term automatically (as the loan is fully cleared earlier).

Unless of course you're making a lump sum overpayment (I don't think the OP is doing this though) in which case you would probably have a choice of the lump sum payment being made and the repayment remaining at its current level to reduce the term or a reduction in monthly payments for the remainder of the agreed term.

If you are already used to paying a certain amount each month then I can definitely see the benefit of being mortgage free a few years earlier, shortening the term will amount to interest savings.

awec

Hassan Calm Teamster wrote: »

Far as I can tell overpaying the mortgage (by increasing your monthly repayment) reduces the term automatically (as the loan is fully cleared earlier).

Unless of course you're making a lump sum overpayment (I don't think the OP is doing this though) in which case you would probably have a choice of the lump sum payment being made and the repayment remaining at its current level to reduce the term or a reduction in monthly payments for the remainder of the agreed term.

If you are already used to paying a certain amount each month then I can definitely see the benefit of being mortgage free a few years earlier, shortening the term will amount to interest savings.

Yes, but the poster in question is talking about getting the bank to officially shorten the term.

That means there is no way to go back to the original payments without the bank approving. You are essentially telling the bank to take away all of that buffer you gained by overpaying, and you're getting nothing in return for it.

awec

awec wrote: »

Yes, but the poster in question is talking about getting the bank to officially shorten the term.

That means there is no way to go back to the original payments without the bank approving. You are essentially telling the bank to take away all of that buffer you gained by overpaying, and you're getting nothing in return for it.

Best way to do it is to overpay and reduce the payment, and then keep paying whatever you can afford. If your payment is 800 a month and you make a lump sum payment and it reduces your monthly to 600, keep paying 800. You'll save the exact same amount of interest, you'll finish the mortgage early, but you can always drop your monthly payment to 600 if something bad happens and you need that extra cash. If you tell the bank to shorten the term you can't do this.

Spot on here.

Sparkey84

awec wrote: »

Yes, but the poster in question is talking about getting the bank to officially shorten the term.

That means there is no way to go back to the original payments without the bank approving. You are essentially telling the bank to take away all of that buffer you gained by overpaying, and you're getting nothing in return for it.

Best way to do it is to overpay and reduce the payment, and then keep paying whatever you can afford. If your payment is 800 a month and you make a lump sum payment and it reduces your monthly to 600, keep paying 800. You'll save the exact same amount of interest, you'll finish the mortgage early, but you can always drop your monthly payment to 600 if something bad happens and you need that extra cash. If you tell the bank to shorten the term you can't do this.

if the bank officially raises the monthly amount there is the risk of comiting to that obligation. however you absolutely do get something for it. a far shorter term. the other thing if the worst was to happen and you needed to renegotiated back down in payments you would have a very strong case as you would be up value to loan ratio

awec

Sparkey84 wrote: »

if the bank officially raises the monthly amount there is the risk of comiting to that obligation. however you absolutely do get something for it. a far shorter term. the other thing if the worst was to happen and you needed to renegotiated back down in payments you would have a very strong case as you would be up value to loan ratio

You don’t get a shorter term. It’s the exact same term you’d have by reducing monthly payments and continuing to overpay.

Example (with made up numbers)

Current payment is 1000 a month.
There is like 200000 left on the mortgage, so 200 months to go.

You get 100k lump sum and pay it, new balance is 100000.

You tell the bank to reduce payments. You continue to pay 1000 a month, but now you’re overpaying and you pay it off in 100 months.

Or you tell the bank to reduce the term, and you pay it off in 100 months.

In both cases, interest paid is the same. In both cases the mortgage term is the same. The only difference is the second scenario is a one way ticket.

ldy4mxonucwsq6

awec wrote: »

Yes, but the poster in question is talking about getting the bank to officially shorten the term.

That means there is no way to go back to the original payments without the bank approving. You are essentially telling the bank to take away all of that buffer you gained by overpaying, and you're getting nothing in return for it.

Best way to do it is to overpay and reduce the payment, and then keep paying whatever you can afford. If your payment is 800 a month and you make a lump sum payment and it reduces your monthly to 600, keep paying 800. You'll save the exact same amount of interest, you'll finish the mortgage early, but you can always drop your monthly payment to 600 if something bad happens and you need that extra cash. If you tell the bank to shorten the term you can't do this.

It can be a different story with a lump sum payment but with a regular monthly overpayment I can cancel the overpayment amount any time I want and revert back to my regular mortgage payment (as I've had to do a couple of times).

I'm only overpaying by 10% a month but the two years I'll shave off at the end is the equivalent of €25k (interest and repayments) and I only started overpaying with 10 years left on the mortgage.

For me personally the thoughts of finishing the mortgage early is a huge benefit but if I had a lump sum to play with I'm not sure I'd be putting it off my mortgage at all if I had a decent low mortgage rate.

If mortgage is fixed you'd be fairly limited with options either way.

ldy4mxonucwsq6

6 wrote: »

Its 10% of the balance.

It's restricted to 10% of the monthly repayment with my bank, is it 10% of the balance for lump sum overpayments or do other banks allow more than 10% for monthly top ups?

TheW1zard

The more you overpay the better Shirley.
Compound interest 101 no?

Sparkey84

awec wrote: »

You don’t get a shorter term. It’s the exact same term you’d have by reducing monthly payments and continuing to overpay.

Example (with made up numbers)

Current payment is 1000 a month.
There is like 200000 left on the mortgage, so 200 months to go.

You get 100k lump sum and pay it, new balance is 100000.

You tell the bank to reduce payments. You continue to pay 1000 a month, but now you’re overpaying and you pay it off in 100 months.

Or you tell the bank to reduce the term, and you pay it off in 100 months.

In both cases, interest paid is the same. In both cases the mortgage term is the same. The only difference is the second scenario is a one way ticket.

your numbers are correct. however that is not what i choose for me, your numbers are based on the assumption that i would have overpaid at all payments. being obliged to pay the full "made up number here" ment i would be less tempted to put the overpayment elsewhere. i can only go with what has worked well for me. you do it your own way. by the way the comparison i made to money saved was directly between money off mortgage and money into a savings account.

Hassan Calm Teamster

Hassan Calm Teamster wrote: »

It's restricted to 10% of the monthly repayment with my bank, is it 10% of the balance for lump sum overpayments or do other banks allow more than 10% for monthly top ups?

Fair enough, probably different rules with different banks. Mine is 10% of balance at start of fixed term.

pwurple

Some basic misconceptions in here.


Overpaying to reduce the term has a very different effect to just reducing the repayment. (As the other poster said, do your compound interest sums). You pay the interest up front my friends.


The above is why the banks default option is to reduce the repayment, not the term automatically. It makes them more money that way. Whoever said they assume the bank reduces the term? I’m afraid not.


At 2.65% rate, there are very few savings accounts with that return on investment.


Speaking to a financial advisor will inevitably end up with them trying to sell you a financial ‘product’ of some kind, usually a stock market investment pack, or a private pension as they earn commission on these. Not that that’s a bad thing, we all should have pensions if possible, just be aware of it.


Oh, and accountants are not the people to advise you on mortgages or risk funds. Accountants are for calculating tax liability. No training in lending. Understand You’re getting a personal rather than a professional opinion there.

awec

pwurple wrote: »

Some basic misconceptions in here.


Overpaying to reduce the term has a very different effect to just reducing the repayment. (As the other poster said, do your compound interest sums). You pay the interest up front my friends.


The above is why the banks default option is to reduce the repayment, not the term automatically. It makes them more money that way. Whoever said they assume the bank reduces the term? I’m afraid not.


At 2.65% rate, there are very few savings accounts with that return on investment.


Speaking to a financial advisor will inevitably end up with them trying to sell you a financial ‘product’ of some kind, usually a stock market investment pack, or a private pension as they earn commission on these. Not that that’s a bad thing, we all should have pensions if possible, just be aware of it.


Oh, and accountants are not the people to advise you on mortgages or risk funds. Accountants are for calculating tax liability. No training in lending. Understand You’re getting a personal rather than a professional opinion there.

I think you're talking as if you reduce the monthly payment, and then don't overpay, right? Which is not what anyone is suggesting.

If you reduce the payment, then continue to pay the same rate as before (i.e. the exact same amount you'd pay if you reduce the term instead) the outcome is the same.

The difference is you are overpaying using this method, which gives you flexibility to reduce your monthly payments in future if you have to.

cruizer101

Just with regards to how much you can overpay
Ulster Bank are 10% of remaining fixed balance.
KBC are 10% of remaining balance.
BOI are 10% of monthly payments.
The others I'm not sure, EBS and PTSB I think you can't actually overpay but the money is held in credit against the mortgage so you don't accrue interest on that amount ( don't take my word on this ).

The other thing that not many people realise is you can split a mortgage between fixed and variable, this will allow you to overpay with no conditions on the variable part of the mortgage.

e.g. you have mortgage of 300k you could split that 250k fixed, 50k variable and then you can overpay as much as you want on the 50k bit.
Ideally if doing this (assuming fixed is better rate) you split such that with your planned overpayments you just pay of the variable portion and the end of your fixed term. You can then fix again and split of a certain amount as variable.

awec

cruizer101 wrote: »

Just with regards to how much you can overpay
Ulster Bank are 10% of remaining fixed balance.
KBC are 10% of remaining balance.
BOI are 10% of monthly payments.
The others I'm not sure, EBS and PTSB I think you can't actually overpay but the money is held in credit against the mortgage so you don't accrue interest on that amount ( don't take my word on this ).

The other thing that not many people realise is you can split a mortgage between fixed and variable, this will allow you to overpay with no conditions on the variable part of the mortgage.

e.g. you have mortgage of 300k you could split that 250k fixed, 50k variable and then you can overpay as much as you want on the 50k bit.
Ideally if doing this (assuming fixed is better rate) you split such that with your planned overpayments you just pay of the variable portion and the end of your fixed term. You can then fix again and split of a certain amount as variable.

AIB don't allow overpaying during fixed term (just to add another to your list).

Sunrise_Sunset

cruizer101 wrote: »

The others I'm not sure, EBS and PTSB I think you can't actually overpay but the money is held in credit against the mortgage so you don't accrue interest on that amount ( don't take my word on this ).

I'm with PTSB and just recently (last month) started overpaying my mortgage. What they told me is that you make overpayments into the account and they are kept as credit until it reaches a certain sum (that you decide, e.g 5k), and then you instruct the bank to pay it off the mortgage and also instruct them whether you want to reduce the term or reduce the repayments.

pwurple

awec wrote: »

I think you're talking as if you reduce the monthly payment, and then don't overpay, right? Which is not what anyone is suggesting.

If you reduce the payment, then continue to pay the same rate as before (i.e. the exact same amount you'd pay if you reduce the term instead) the outcome is the same.

The difference is you are overpaying using this method, which gives you flexibility to reduce your monthly payments in future if you have to.

It's not automatic though... The bank chooses the option which is most lucrative for them by default. They will send you a letter reducing your repayment amount and adjusting your direct debit accordingly.

Ulster bank, AIB, KBC and BOI all do this in my experience, so I'm going to extrapolate that most banks do the same.

cruizer101

I overpay with Ulster Bank and it just comes off the mortgage balance, no change to the defined term (it will just be paid off before the full term) and no change to the monthly repayment it still just direct debits for the same amount.

I never received an letter regarding the overpayment nor did I instruct the bank in any way.

Now thats a 4 year fixed it may be different for variable.

um7y1h83ge06nx

I'm with Ulster Bank on fixed as well and had to send the mortgage group a letter to instruct that I wanted the lump sum to reduce the mortgage term. They sent a letter back confirming this and it all went through fine.

By default it reduces the monthly payments.

antix80

NoviGlitzko wrote: »

Find an accountant who your family or extended family trusts - ask them for advice mate.

:rolleyes:

drunkmonkey

Move it to a bit weekly payment rather than a monthly one.. your slightly overpaying the mortgage but attacking the interst quicker. You won't really notice it for a few years.

Amirani

awec wrote: »

This is not true. The saving is exactly the same, but reducing the mandatory payment vs reducing the term is much safer.

I cannot think of a single advantage to reducing the term when overpaying a mortgage.

If you're with Bank of Ireland for example, and limited to only overpaying 10% of the mortgage repayment, then reducing the mandatory payment means your limited in what you can repay.

For example, your mortgage is €1000 p/m. You want to regularly overpay by 10%, so paying €1100 p/m. If you reduce the term, you can continue paying €1100 p/m for the entirety of the mortgage. If you reduce the payment, then you can't, because you'll only be allowed to pay new payment amount + 10%

In this case, reducing the term results in finishing the mortgage sooner, and paying less interest over the life of the mortgage.

JJJackal

If you have a 30 year mortgage at interest rate of 2.65% and you pay of an extra euro in month 1 it will save you approximately 1.19 euro in interest.

It will also allow you to use the money (i.e. the 1.19 euro over 30 euro) that you are no longer using to pay the interest to pay down principle thus further saving.

Sunrise_Sunset

My mortgage with PTSB is split. The majority of it is tracker + 1% (2.1%), and I've another 40k on a fixed rate of 3.2% for 5 years.
I know that I can make overpayments on my tracker without any penalties.
Today I enquired with them if the same can be done with the fixed portion. They told me I can transfer money to the mortgage account until the fixed term is up, then I can make the overpayment, before starting my new term.
I don't know if this is worth my while, or whether I should just increase the overpayments I have recently started making on the tracker portion. The fixed portion monthly repayment is 205, and could only afford to "overpay" by 25 per month. Over 5 years this would be 1500.
I want to avoid any penalties and hope that the information they gave me is correct.
I started overpaying the tracker by 150 per month. Although the interest rate is lower, at least I know there won't be any penalties for overpaying, and I hope to knock about 5 years off the term.