Q I have been regularly overpaying my mortgage since April 2009. The mortgage agreement states that the lender will immediately reduce the mortgage balance on which the interest is charged, meaning I should receive the benefit straight away. My repayments have remained the same as there has been no change to the interest rate over this period. Am I right in assuming that my repayments should have been reduced following each overpayment? MM
A Not necessarily. You should have expected to see your monthly payments go down straight away if you have an interest-only mortgage because, in that case, your monthly payments are made-up entirely of interest.
With a repayment mortgage, where monthly repayments are made up partly of interest and partly capital, your lender may keep your monthly payments the same but alter how much of it is made up of interest and how much capital repayment. Your overpayments should increase capital repayments and reduce interest. By keeping your monthly repayments the same you automatically reduce the term of the mortgage.
Your lender may also require a minimum monthly overpayment before it will change the monthly repayment it requires from you. It may also wait until there is an interest-rate change to recalculate what you pay each month. It might be worth checking with your lender if you are determined that you want your overpayments to be reflected in lower monthly payments straightaway.
Source: http://www.guardian.co.uk/money/2011/jun/22/mortgage-overpayments-reduce-monthly-repayments
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