I know there are a lot of financial whizzes on STW, I wonder if you could help me out – I’ve never had a mortgage in the UK but I *think* my assumptions are correct, but I’m willing to listen to any advice given.

Scenario: A friend is remortgaging soon as she is currently at the end of her current deal, and her rate has reverted to the lender’s standard variable rate (something bad, about 5.9%) – because she has a relatively high LTV (about 85%) she is struggling to get a good deal, and is looking at about 3.8% APR fixed over the next two years. This is a standard repayment mortgage, interest and capital calculated daily.

My theory is that if she overpays this mortgage every month the effective APR can be brought much lower and in 2 years enable her to significantly reduce her LTV, and then jump on an even better deal.

I’m not sure how to calculate this effective rate – does anyone have a tool that could calculate this? Current figures are £122k outstanding over 22 years. 3.89% APR works out at roughly £689/month repayment. I would like to show workings for overpayments of say £200/month, £400/month and £600 /month.

(I know that there might be more effective ways of saving money but she wants to get rid of the mortgage as quickly as possible, which I can understand)

Cheers

Keith

Some lenders cap the amount you can overpay, e.g max 10%, which would equate to £70/month only!

Isn’t it 10% of the outstanding balance…not your monthly payment?

So £12k a year or an extra £1k a month allowed on overpayments?

depends on the mortgage doesnt it the cap.

im 10% of the borrowing but have friends who cant overpay more than 100 quid.

there are templates for just this on excel and numbers btw

You might be right dooosuk.

Check out this overpayment calc. Doesn’t take every factor into account, but is enough for most people.

Rather than mucking about overpaying every month, why don’t you just ask for illustrations of the loan with differing repayment periods.

For example, how much extra a month is it if I knock a year off the repayment term, etc.

That way you achieve the same result, but still have the flexibility to pay a bit extra if you want to and can afford to as and when you can

Oh, and the amount you can ‘overpay’ each month without incurring penalties will vary from mortgage to mortgage, so you’d need to check the policy.

as above, ie it sounds like she should make sure she gets a mortgage that allows the overpayments she wants to make. gf mortatge capped at £500per month, given above sounds like overpayment limits are part of each individual mortgage

Also try understanding an offset mortgage, they ‘generally speaking – please calculate your own figures’ work if you want to have an amount of savings and a mortgage simultaneously, but it might be a way of ‘overpaying’ if you see what I mean, however rates are usually higher than norm – so it may not be the best deal for you..

How much is the arrangement fee for the 2 year mortgage? That could wipe out any savings made.

^Wise words from breatheeasy

How much is the arrangement fee for the 2 year mortgage? That could wipe out any savings made.

Very important point.

A number of years ago when our 5 year deal was ending we went to our lender at the time to discuss a new deal.

best they could offer was a slightly (and I mean very slightly) reduced rate fixed for 2 years plus an arrangement fee.

Worked out the total saving was £50 over the 2 years.

Went to a mortgage broker who got us a fantastic deal elsewhere and ended up saving a lot more than that every month.

Thanks all – the current deal is with the same lender and there is no arrangement fee. She has checked and can overpay up to 10% per year of the total balance. Doesn’t seem like a bad deal really.

Thanks again STW!

Like that page, provided I can pay off at my current rate of overpayment I should be clear in 14 years not 22. That does depend on factors for me not changing too much over the next 14 years though!