Am I calculating mortgage overpayment penalty correctly?

[AlexC1981]

Hi All,

I need to remortgage and one of several options I am considering is an HSBC 5 year fix at 5.19%.

From the HSBC website:

https://www.hsbc.co.uk/mortgages/existing-customer...

"The ERC is calculated as 1% of the amount repaid early that's above your 10% annual overpayment allowance. This is for each remaining year of the period where the ERC applies, reducing on a daily basis. However, after taking your 10% annual overpayment allowance into account, a maximum of 5% of your overpayment will be charged."

I don't understand the bit about the maximum 5%?

This is how I think it works:

Say if I'm x years into the 5 year fixed term and I have £150k left to pay. In that year I can overpay £15k without penalty. If I wanted to overpay £20k that year, I would pay a penalty of 1% on £5k, which is £50.

The following year in, say there is say £120k left to pay. In that year I can overpay £12k without penalty. If I wanted to pay £20k over again, the penalty would be on £8k, so £80.

But what does the "maximum 5% of your overpayment will be charged" statement mean?

Also, not sure how to factor in the "reducing on a daily basis". Does that mean the amount I can overpay in a year is reduced if I don't overpay anything until, say 6 months into that year?

[OutInTheShed]

If you pay it 10 years before the ERC period ends, the ERC is 10 years x 1% per year. =10% of the excess overpayment

But they limit that to 5% of the whole overpayment?

[Lady_Beefmaster]

If you’re looking to regularly overpay on your mortgage, First Direct offer unlimited overpayments to their mortgage products and are also a similar rate to HSBC since they’re part of the same group.

Imagine the product you’re looking at probably has an ERC which reduces each year during the fixed term - e.g 5% fee in year one, 4% year two etc.
- that’s normally how they seem to be structured on fixed rates we had in the past with other lenders.

[OutInTheShed]

Is the 'ERC applicable' period the same as the fix period?

I'd guess so, but guesses might be wrong.

[speedking31]

I agree with OutInTheShed.

Because it's only a 5 year fix the 5% limit doesn't come into play.

Using your examples, in year 1 after 6 months penalty = 4.5% x £5k = £225.
A year later = 3.5% x £8k = £280.

I think.

[AlexC1981]

Yes the ERC is only applicable during the fixed period.

I think the penny's dropped now! Thanks for the explanations.

The way the overpayment charges are calculated makes it much harder now to compare this mortgage with one that has a higher rate, but no overpayment charges.

None of the online calculators are able to take into account this sort of thing, so I'm trying to compare various mortgages on a spreadsheet. Not fun!

I had a look at First Direct, but their rates are not the best. I'll have to work it out. I might not be able to make as many overpayments as I would like if life gets in the way, so I this HSBC mortgage still might be the best option.