Making Overpayments on Your Mortgage

by Mark Alexander

10:08 AM, 17th February 2012
About 9 years ago

Making Overpayments on Your Mortgage

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Making Overpayments on Your Mortgage

In the last month I have received letters from three of my mortgage lenders suggesting that I should make overpayments on my buy to let mortgages. Their logic is that my mortgage payments have reduced considerably due to interest rates having dropped substantially since I first took the mortgages. They are right! I’m paying less than half what I used to pay as these are base rate tracker mortgages and the base rate is now 0.5% where it used to be 5%.

That’s a 90% reduction in base rate, lovely!

Am I going to take their advice?

Am I heck as like!

If I make overpayments on those mortgages, what are my chances of ever being able to borrow at those rates again?

If you are planning to reduce your debts based on your mortgage payment having reduced considerably there is a logical way to go about it.

The starting point is to create a list of all your debts and to order them by the interest rates you are paying. For example, if you have a credit card debt you might be paying as much as 30% interest on that. You may then have bank loans which are a bit cheaper and so on. Chances are your mortgages will be your cheapest debts in terms of interest rates. That’s not to say they are all the same rate so list those in order of interest rates too.

If at all possible, raise more cheap money (low interest rates) to repay the more expensive debts first. For example, if you owe £5,000 on credit cards which you are paying 30% interest on, find out if your mortgage lender will offer you a further advance on your mortgage to pay of the more expensive debts. In other words, swap expensive debt for cheap debt wherever possible. If your mortgage lender will oblige, the interest rate is likely to be significantly lower than you are paying on your credit card and you will see your monthly interest bills reducing. The same theory goes for all other debts. You can then add these savings to the extra money you were planning to use to repay your mortgage but instead of doing that, simply pay off your more expensive debts first. As you pay off your more expensive debts you will have more and more money to continue to chip away and any other debts and you will find that you debts begin to reduce very quickly after a while.

If you do have cheap tracker mortgages then be sure to pay these off last, still following the logic of paying off those with the highest interest rates first. Do check with your mortgage lenders too before committing to over-payments as some lenders actually charge you fees if you repay more than a certain amount in a year.

It also makes sense to build up a financial reserve before you repay cheap mortgages so that if you do ever need to raise extra money you don’t end up paying more for it. Offset mortgages can also be a useful tool but if you need advice try speaking to a good mortgage broker.

It’s also important to remember that you can offset your mortgage interest on your buy to let mortgages against your rental profits. Therefore, even if your personal mortgage appears to be slightly cheaper than your buy to let mortgage it may well be worth paying down your personal mortgage before you start paying off your buy to lets. It’s well worth paying for a quick meeting with a local accountant to work the figures out for you.

I wrote a related article back in October 2010 called “What you shouldn’t do with your buy to let mortgage“. Simply click on the orange text to read that article.

My concern is that with so many of these letters going out to landlords, some will be thinking it’s a good idea to make over-payments on their mortgages without thinking things through properly. Therefore, I urge you to share this article via email, Facebook or Twitter with any other landlords you know.

Just ask yourself why these lenders are suggesting this. Could it be that any money you pay off your cheap mortgage could be loaned to a new borrower at a considerably higher price? Call me skeptical if you wish but if you are happy to trust bankers to offer advice that’s in your interests that’s obviously your choice.


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Comments

10:36 AM, 17th February 2012
About 9 years ago

I share your cynicism and I have been using your strategy for about 20 years.
It is common sense; but as you have suggested such sense isn't common!?
In fact I would be very dubious about offset mortgages; in principle a great idea; I used to work the system with free credit card money and my Direct Line mortgage saving myself a lot of mortgage interest as I was rolling about
£50000 through my mortgage monthly at ZERO cost to myself.
That game has really come to an end now as you can't really obtain free credit card money like you used to.
The big issue is if you pay too much in your offset mortgage they might reduce your LTV and you won't be able to borrow back the monies you have overpaid.
So despite the savings being the best if you pay into the offset mortgage I wouldn't trust a bank as far as I could throw them so I keep my small cash pile separate, even though this is not the best way to save on mortgage interest.
I prefer to be in contol and keep my monies in diferent acounts who have no organisational contact .
I know all the  banks  and who belongs to who; so I won't get caught out with a Sainsbury mortgage and savings in a Halifax account.
You've got to get up earlier than that to catch me out!?

Mark Alexander

10:50 AM, 17th February 2012
About 9 years ago

I share your cynicism Paul and I don't have an offset mortgage either for exactly that reason. However, as a generic article it would have been remiss of me not to mention Offset Mortgages because if I hadn't I'm pretty certain an FSA bod or a qualified mortgage adviser would have soon pointed that out to me. I must dismiss my own predjudices when writing articles like this as I'm sure offset mortgages will be right for some people and circumstances, especially those who are prepared to take the risk that their lender will not hide behind their small print when people want to borrow back their over payments. I had quite a few comments on the article I've linked to in orange text from landlords who got caught out that way with the Mortgage Express Choices overpayment facility.

23:35 PM, 17th February 2012
About 9 years ago

Funny that I'm with M Express and they didn't con me; I was far too wise to be caught out by their blandishments.
I do understand you have to think in generic terms for articles irrespective of your own personal methodologies.
It is a real shame the banks behave like this because in principle an offset mortgage is a fantastic money saving product.
I think there is a threshold of savings  at which it is viable to have an offset mortgage of about £30000.00.
This is due to the higher interest rate that offset mortgages generally charge.
I do remember at the height of the credit crunch Abbey, as was, reduced an offset mortgage facility on a businessman's mortgage which was inconvenient to say the least for him on the basis that a large sum of money that he had put into the offset mortgage was due to be paid to HMRC!!
How he got out of that situation I don't know.
But I do remember panicking at the time of Lehmans, when first announced.
I could see what was was going to happen.
I had convinced a  childhood friend of mine that an Abbey offset mortgage was the ideal one for him.
Believe me I had a hard job convincing him that now he should take out ALL his savings from Abbey and put them in a completely different company from Abbey even though this was clearly of less benefit to him.
Not that he was going to do anything with those savings but that wasn't the point.
The clincher as far as he was concerned that if he left the savings in the account he may not be able to access the positive equity facility if he chose later on.
Anyway he agreed with my new suggestion and is now safe with a large Santander offset facility with which he makes interest only payments topped up by a capital payment from his savings which he keeps topped up in a non-Santander account.
He is therefore able to have his own repayment stategy based on the fact that he only has to make an interest only payment and if he wishes he can choose to add to that monthly payment as part of his capital repayment plan.
At the time Abbey actually hadn't reduced anyones's LTV offset mortgage facility.
There was nothing in the public domain at the time that this would occur, it was only later that it came out in an obscure mortgage condition that Abbey could arbitrarily reduce the LTV facility.
Of course one could be really cynical on the basis that if everyone used the efficiency of an offset mortgage there would be a massive hole in govt finances as they receive a lot of tax from people's savings accounts.
So the last thing govt wants is for everyone to be on an offset mortgage product.
In extremis I think there was also a condition that if the LTV fell below 90% then due to reduced property value then Abbey could request more lump sum monies into the mortgage facility.
Fat chance of anybody doing that and how would Abbey enforce such a condition; they'd have no chance.
So ostensibly whilst the offset idea is a great idea in principle the banks can't be trusted and for that reason for most people the product is a no no.
I would suggest much to the relief of HMRC who would have lost millions in credit interest tax!
These offset products would be a brilliant way for people to manage their financial affairs; but it seems to me to be so much of platitudes from the banks, who don't really like the idea of someone being in charge of their own debts and maximising circimstances for their own benefit.
Of course the big risk with offset is down to the borrower as it puts temptation in their way.
It essentially allows one to spend easily the bricks in your house, whereas at some stage all the bricks have to be put back to have built the total house and to end up having no mortgage debt.
So perhaps as lots of borrowers have stated that they wouldn't trust themselves with easy access to their equity.
So perhaps the resultant effect of the non-efficacy of these offset mortgages has been to protect borrowers from themselves.
Sometimes for some people total empowerment is not a good thing!?.

6:37 AM, 23rd February 2012
About 9 years ago

Hi Mark

Thanks for your article. I have recently been stung by Morgage Express's Choices product as my LTV was 112.72% at the time they persuaded me to take up the product. I was not aware of this at the time. Having made overpayments I am not able to now access the overpayments. The Financial Ombudsman Service's adjudicator have reached an assessment in my favour however Mortgage Express won't act on it so it is now being referred to an ombudsman which could take 14 months.

I now you don't offer an arbitration service. But can you 1. Recommend any other course of action. 2. How can i found out about other cases brought against Mortgage Express or other providers offering similar products.

Regards

Michael

Mark Alexander

7:32 AM, 23rd February 2012
About 9 years ago

Hi Mike, the FSA principles governing Financial Promotions is that they must be "clear, fair and not misleading". I am not aware as to whether the Mortgage Express Choices product has been tested in law or not and I would suggest you refer to a solicitor or a barrister to obtain that information. As you are taking action against Mortgage Express some of the stories shared by their customers on this website may go some way to help your argument that you do not believe the promotion was "clear, fair and not misleading". I hope this helps. 

7:46 AM, 23rd February 2012
About 9 years ago

Thanks Mark for your reply.

I am hoping the written assessment from the adjudicator will help my case. However I am concerned that I could caught up in excessive legal costs if I instruct a solicitor / barrister as there are no guarantees. Do you know if the adjudicators assessment holds much weight or do I need an ombudsman's report.

Mark Alexander

8:31 AM, 23rd February 2012
About 9 years ago

Sorry Mike, I don't know. Have you considered talking to a no win no fee solicitor? If you Google "Unfair banking no win no fee" there seem to be several companies offering that service. If you manage to find one willing to take on your case I would be very interested in covering your story as it progresses and also talking to your appointed legal advisers.

9:43 AM, 23rd February 2012
About 9 years ago

Mike, given
the assessment from the
adjudicator you may find that one of the TV consumer protection programs would
be interested in your case.

The problem is
I don’t know if Morgage Express wishes to protects there “band image”….  If not they may not back down when the TV company
comes to interview them.
The problem is
I don’t know if Morgage Express wishes to protects there “band image”….  If not they may not back down when the TV company
comes to interview them.

16:34 PM, 26th February 2012
About 9 years ago

Hi Ian
 
Thanks for that. Do you know any particular contacts?

I am hoping that as Mortgage Express is now state owned that they would have more pressure to act in the interest of the customer.

16:37 PM, 26th February 2012
About 9 years ago

 Hi Mark

No I haven't maybe i should. Will google it.

Thanks for your interest in covering the story. I have adjudicators letters which find in my favour. If you let me have your email address I can forward it on to you.

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