Over paying Mortgage - Credit build up

[Jane]

Hi all,

I'm on a Tracker LTV Mortgage with Permanent TSB. As my Mortgage was quite low (I only took out about a 60% Mortgage at the time) I've been over paying for about 18 mths.

I contacted the bank recently and they've advised that I've built up a credit of a certain amount. So they state it as Mortgage = x and Credit = y) but the balance is the net of the two.

To be frank I'm not sure if I should be asking them to offset this now against the total amount or leave as is. They've advised it makes no difference as by overpaying I'm reducing the term of my Mortgage. At the current rate (which I know will change) it will be paid off by 2016 when the original term was 2027.

Does this sound right or should I be asking them to offset it? Do I gain anything by doing that now? My feeling is that I've built up a buffer for myself if I ever get into trouble and it might be best to leave that buffer there.

Thanks for your help.

 

[Jane]

ok then

 

[Berni]

So they state it as Mortgage = x and Credit = y) but the balance is the net of the two.

As long as they are charging you interest on the balance x - y, then I see no reason to ask them to reduce the mortgage amount.
If you do then you may find it very hard to get them to take the prior overpayment into account should you get into difficulty paying at a later point.

 

[Jane]

Thanks Berni

 

[huskerdu]

If I understand you correctly, you have overpaid the mortgage, but this money is sitting in an account and has not be used by the bank to reduce the capital owed on the mortgage.

If so, you are paying interest on the mortgage and getting interest on the credit amount, which are really just savings in an account.

You need to find out what interest these savings are getting. They may only be getting a current accountrate of <1%.

If the interest you are getting on the savings, is less that the interest that you are paying on the mortgage then you are losing out.

You have two choices

1) Ask the bank in writing to use the savings to reduce the capital.
Pros - your mortgage capital is less, so the amount of interest you will pay over the rest of the mortgage will be less. In the event of the ECB rate going up, this saving could be significant

Cons - it is difficult to get access to this money if you ever fall on hard times.

2) Leave the situation as it is.
Pros - if interest rates go up, you will not have to pay a larger monthly mortgage payment, as you can dip into the savings to pay the difference.
- If you lose you job, or have a pay cut, you can use this money to pay the mortage.

Cons - the money may not be getting much interest the meantime, so will lose value against inflation.


You might be happy to do option 1, if you have a rainy-day fund built up or you might be more
comfortable with option 2, or a combination of both.

 

[Jane]

The money is not in a separate account but I do need to find out exactly how they are applying it to the capital.

Thanks