Should I continue to overpay my mortgage?

M

marymarcy

Guest
Hi, looking for some advice.


I have an ICS tracker mortgage, originally €182k, 35 year term, due to finish in March 2041.
I am single and paying it on my own, I am a civil servant, and will be 63 when the mortgage is paid off.
The interest rate is currently 2%, the basic payment approx €600 per month, and I have been overpaying the mortgage by about €250 per month for the last couple of years.
As of the end of 2011, the balance was just over €160K.


Having enquired with ICS, by continuing to overpay at the rate I am doing, I will save €20k plus in interest, and bring the end of the mortgage back to 2029.
I am happy to shorten the term of the mortgage in this way as my health is slightly dodgy and it would be a comfort to think I would have it paid off early, maybe this is foolish, I dont know.


I have savings of €21k, currently divided between the local credit union (into which i am also paying €200 per month but am going to move my business somewhere with a better interest rate), and AIB savings accounts with interest rates of 2.79% and 3.72%.


I had been thinking of paying a lump sum off the mortgage from my savings (probably €5k), but this seems foolish when the interest rate on the mortgage is currently so low, so I think I will just put it on deposit at the best rate I can get.


However, am I doing the right thing in continuing to overpay the mortgage?
Would it make sense to increase the overpayment even more, whether using the €200 I am currently putting in the credit union, or part of the existing lump sum savings?
Or should I keep it all on deposit? I'm not interested in investing and will need to keep at least a third of the total sum easily accessible.


Any thoughts on any of this would be very welcome.


Thanks,

Marymarcy
 
Just make sure that the extra payments are being capitalised and not just sitting in your account as a credit. The extra payments should be taken off the capital. Some people might leave the equivalent of 6 months repayments in their mortgage account before heading off on a six month vacation. The bank doesn't really know what you are doing unless you tell them.
 
I think you ought to think about income in retirement other than your guaranteed pension.
 
SlugBreath said:
Just make sure that the extra payments are being capitalised and not just sitting in your account as a credit. The extra payments should be taken off the capital. Some people might leave the equivalent of 6 months repayments in their mortgage account before heading off on a six month vacation. The bank doesn't really know what you are doing unless you tell them.
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Hi

What is your basis for suggesting this? I have seen others saying it before and I don't believe that there is any basis for it. (When interest was calculated on the annual rest basis, there may have been a basis for it)

Interest is calculated daily on the outstanding balance. "payments are being capitalised" doesn't really mean anything. Arrears can be capitalised. The outstanding balance is reduced by all payments received.

I would be interested if you have any hard evidence to the contrary.
 
I worked in a financial institution. Unless a person specificially asked for the payment to be taken off the capital then it sat in the account as a credit (with interest being charged on the lower balance). Many people would lodge 3 or 4 months repayments in to their account. Some people were just paying the next 3 or 4 months in advance.
When you make a capital repayment you have two choices. One choice is to leave existing repayments the same but reduce the term of the loan. The other choice is to leave the term the same but reduce the monthly repayment.
I would suggest that if someone is paying extra every month that they contact their bank and tell them that they either want to reduce the term of the loan or reduce the monthly repayment.
 
SlugBreath said:
I worked in a financial institution. Unless a person specificially asked for the payment to be taken off the capital then it sat in the account as a credit (with interest being charged on the lower balance). Many people would lodge 3 or 4 months repayments in to their account. Some people were just paying the next 3 or 4 months in advance.
When you make a capital repayment you have two choices. One choice is to leave existing repayments the same but reduce the term of the loan. The other choice is to leave the term the same but reduce the monthly repayment.
I would suggest that if someone is paying extra every month that they contact their bank and tell them that they either want to reduce the term of the loan or reduce the monthly repayment.
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When I told ICS I was going to overpay monthly, they told me that would reduce the term, which was my aim.
 
marymarcy said:
When I told ICS I was going to overpay monthly, they told me that would reduce the term, which was my aim.
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If you decided that you wanted your overpayments paid back to you I assume that you can do this?

When you get your annual statement of your mortgage account how are the overpayments shown? Do they show as coming off the principal?
 
During the first half of your mortgage, the majority of your monthly repayment is made up of interest. During the second half of your mortgage the majority of your monthly repayment is made up of capital.
I would say that in the first year of your mortgage your monthly repayment is going toward interest with a tiny fraction going off the capital sum.
When you make an additional payment on top of your existing repayment is this going off the capital or interest?
I have always been led to believe that what you make an additional repayment to your mortgage, be it a lump sum or smaller monthly amounts that you contact your lender before the end of the year and ask them to take the additional payments off the capital sum.
If you keep your monthly repayments the same then on year two more money is going off the capital sum each month.
 
marymarcy said:
Such as an AVC or what do you suggest?
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Is that additional voluntary contribution to pension?

You should invest your money in whatever will give you the best return in retirement. Something safe that will be guaranteed, that doesn't cost a lot in terms of fees or eating into capital. I presume you are a low risk person. The post office might be the place to start. Or the AVC as long as you understand it. Or even a savings account paying high interest.
 
SlurrySlump said:
When you make an additional payment on top of your existing repayment is this going off the capital or interest?
I have always been led to believe that what you make an additional repayment to your mortgage, be it a lump sum or smaller monthly amounts that you contact your lender before the end of the year and ask them to take the additional payments off the capital sum.
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Your monthly repayments cover all the interest so it is not possible for additional payments to also pay interest.

There are a number of different ways a bank can treat overpayments so it is worth talking to them to understand how any overpayments willbe treated.

As I see it the options are:

1. Unexpected Extra payments are placed in a separate account and are not credited to the mortgage account until either an instruction is received or a payment is missed - I think PTSB operated like this
2. Extra payments are paid directly into the mortgage account and repayments are not recalculated, meaning the term of the loan is shortened.
3. Extra payments are paid directly to the account, repayments are reduced and the overall length of the mortgage remains the same - bank of Ireland operate like this
4. Offset/ current account mortgages - I don't think there are many of these but depending on the individual T&C's additional cash reduces the balance that interest is paid on but the mortgage balance reduces according to the originally agreed schedule, withdrawal of overpayments may be allowed.

You can agree the treatment in advance with your bank or wait and see what they do with the overpayment, for most mortgages it will either be option 2 or 3.

Generally, afaik, you shouldn't assume overpayments can be withdrawn, KBC had a product that allowed this but it is no longer offered.
 
In this regard anyway NIB is very transparent. Interest accrues daily, and is charged monthly in arrears on the last banking day of the month.

If my balance was €100K, and my interest rate is 4%, on line I can see the interest to be added to my account is €10.96 daily (€100K x 4% / 365). If I have not made a payment after 10 days €109.60 will be displayed as the current amount to be added on the last banking day of the month.

If I make either a scheduled repayment or an extra payment of any amount big or small my outstanding balance drops immediately, and interest accrues on the lower balance immediately. So if I paid €2K into my mortgage I would be able to see online the outstanding balance is now €98K and the interest to be added on the last banking day now only increases by €10.74 daily (€98K x 4% /365).

Unless you tell them otherwise, once each year or when interest rates change, repayments will be reviewed and adjusted if necessary to ensure the the loan is repaid over the agreed term. In this case overpayments would lessen interest paid and result in reduced monthly payments over the original term.

The better option if you can afford it is to instruct them not to reduce payments until further notice, and/or instructed them to take additional fixed amounts until further notice while continuing to make additional payments with any spare cash, all of which will result in reducing the term and interest paid substantially.

Not all lenders appear to be transparent in this regard like NIB.
 
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