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Mortgage overpayments - how do they work?
If you make mortgage overpayments for several years does the total owing on the mortgage show this overpayment or is it set aside?
Eg would a building society state it is "£100,000 left owing with an overpayment reserve of £10,000." (Sort of like an endowment) Or would it say "£90,000 left owing, including overpayments of £10,000."
Also, if you use the overpayments to allow you a couple of years holiday from the monthly mortgage payments, how does that work in terms of interest? Your amount left owing would go up a small amount every month, instead of down, because you are not technically adding funds so you'd get more interest?
Any help in understanding this gratefully received by a maths thickie. :-D
Eg would a building society state it is "£100,000 left owing with an overpayment reserve of £10,000." (Sort of like an endowment) Or would it say "£90,000 left owing, including overpayments of £10,000."
Also, if you use the overpayments to allow you a couple of years holiday from the monthly mortgage payments, how does that work in terms of interest? Your amount left owing would go up a small amount every month, instead of down, because you are not technically adding funds so you'd get more interest?
Any help in understanding this gratefully received by a maths thickie. :-D
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Whether or not you are allowed a payment holiday will depend on the terms if your particular mortgage, having made overpayments may not make any difference to that.
And yes if you are allowed a payment holiday any interest you aren't paying gets added to the capital sum owed.
It is different if you have an endowment mortgage though - you have to arrange to reduce the amount of your mortgage because your regular payments don't reduce the capital.
Check with your mortgage T&Cs to see how much you can overpay and how the lump sum and regular overpayments are handled.
If you make a lump sum overpayment you can use that to reduce your monthly payment or keep that the same and reduce the term of the mortgage.
Each month your payment is credited to your account and a sum of interest that will vary depending upon the number of days in the month is debited to the account.
The monthly payment may incorporate an overpayment in that you pay more than you need to every month. Or you can simply credit your mortgage (if conditions permit) with spare cash as and when you feel like it.
When I still had a mortgage, I chucked money into it whenever I could - even if it was just a random 1p I had spare.
So when you use the overpayments to have a "payment holiday" you'll use up the overpayments you've previously made AND the interest will go up so the total owing will increase each month?
To explain further why I was asking. My friend's exhusband as part of the divorce agreed to make the mortgage payments on the house instead of alimoney (or whatever you call it). However, she's discovered that for the past 6 months he's been using previous years overpayments (made while they were married) to make the monthly payments.
So what we're trying to work out is how this effects assets etc and the mortgage. ie the mortgage owing amount will go up instead of down? This will then eat into the profit when it's sold. Does that then men he's essentially paying alimoney from my friend's own assets?
It's all very confusing. She does have a solicitor but obviously they charge for their time so she wants to try and make sure she understand everything as clearly as possibly before discussing it with them.
You can't use prior overpayments as a payment, that is a nonsense. He's basically paying nothing and allowing the mortgage to build up to what it would be as if they had never made overpayments. This suggests he has no intention of paying off the rest of the mortgage as it would make it more expensive for him to pay it later.
Your friend needs to get on to her solicitor.
Overpayments are just that - voluntarily paying more than you need to to get ahead. As long as the provider is ok with it there's nothing to stop a borrower dropping back to to the original position. The ex-husband is being quite savvy in what he's doing as he's getting back some of the value in the house without waiting for the settlement to work its way through.
So pop into your nearest branch and ask. Do not be afraid to ask detailed questions, and even go back later if you have more questions.
While I am on I will say something. You do not get a large number of totally superb excellent wonderful great deals in your life. Borrowing money from a mutual society (or an honest good bank) on mortgage for house purchase is one of the few deals that are all those things and more.
So why get out of it by repaying money when you don't have to? Of course you might knock 5 or 10 years off, but I can assure you that by the time you get to repaying the last 5 years you will not even notice them as they will be very small.
So I would not overpay because that loan is such a great deal.
But if you must, make sure you don't do it without consulting them as I said above, otherwise they might stack up the overpayments, give you zero interest, or worse.
Yup, the bank has said it's okay. It's just using the overpayment reserve to make the monthly payments. But that means the monthly total of what's owed is going up, so as you say he's taking some of the value back from the house by not making monthly payments.
Value of house = Say £100,000
Mortgate = £90,000
Equity = £10,000. That should be split between both, so £5,000 each. (assuming 50/50).
What he is doing is not paying anything. Even if he argues that he was using previous overpayments, they were overpayments pre divorce, so would be included in the calculations of in the divorce payments. Any payments need to be completely seperate from the marital assets.
For example - there may be children involved. The husband may have agreed to keep the same roof over their heads until they are 18, finish education, whatever, whereupon the house would be sold and proceeds divided. In which case what he's doing is perfectly reasonable.
As I said in my previous post, he agreed to continue to pay the monthly mortgage payments until the house is sold. As far as I see it he is failing to make those payments, as he's actually taking the monthly payments from the asset that is the house, which is then actively decreasing the value of the house as the mortgage is rising.
To be honest, I only explained it to try and make the situation clear. I was really only posting to try and understand the financial implications of an overpayment reserve being used. (i think I've got a handle on that now) I realise no-one on here can truly understand if the situation is right or wrong.
Making up figures, if a £100,000 loan has a monthly payment of £500, the first month pays off £490 worth of interest from the 100,000 debt and £10 of the capital. Next month the 500 pays off 489.50 interest off the 99, 990 debt and 10.50 off the capital. Month 3's £500 payment pays 488.83 worth of interest on the 99, 979.50 debt and £11 of the debt. Over time the interest due reduces as the debt is paid down, leaving more of the £500 to pay off the capita, which reduces the interest at a faster rate which is why the last few payments reduce the debt very quickly. The lender calculates the payment to achieve this.
Overpayments reduce the capital owing hence the interest is lower, so by making payments from the overpayments he's just allowing the mortgage to return to its original plan. You could describe it as rising I suppose but in overall terms it isn't.
Yes, he is failing to make those payments - but it depends on how the share was calculated. If it only took account of the as at position (including past overpayments), then he is failing to make payments - no capital is being paid off, and so more interest is being added to the mortgage. If however, the agreement took account of what was expected (ie: minimum payments), then the actual mortage would have been lower then what was expected, and so what he is doing is fine.
I would have thought that logically they would have taken an "as at" position, and so trying to use and past overpayments is just wrong in my opinion. It would also mean that the mortgage is not decreasing as much as they would both expect to.
That's exactly it Keefy, thank you.
So the total owing is rising each month because none of the capital is coming off and the interest is rising?
I can promise you that this action is not in anyway justified. There were no third parties involved, and there's no risk of third parties getting their hands on assets. The husband earns a 6-figure wage, and the wife doesn't earn anything (she was a stay at home mum for the 13 years of their marriage, as they agreed it was better for her to full time raise the kids as they could afford it). That's what makes it all the more galling, and unbelievable (which is why we've been trying to figure out if that is REALLY what he's doing because the wife really doesn't want to think the worst of him). His wife has literally nothing, isn't getting to keep the house and once it's sold will barely have enough for a smaller house in a poorer part of town. The idea that he'd then try and do her out of MORE money, which is going to affect the kids worst as they are going to move and have a much lower standard of living, is really quite shocking to the wife (and everyone who knows them).
All for the sake of a few hundred pound a month that he can easily afford.