Retire from 8 to 5 

When we moved to the UK in June 2022, we did not consider the challenge of getting a mortgage. We had limited credit history. None of our US credit history transferred to the UK. After a few days of mortgage shopping, we assumed we would need to be renters for another year or so. Luckily, Lloyds offered us a mortgage and we have stayed with them since November 2022. Every November we have an unusual, rather useless, two hour conversation with a mortgage advisor. Let us tell you more, and you could benefit from it.

When we signed up for our mortgage it was at 3.55% fixed rate for 5 years. This was followed by a variable Bank of England rate for the remaining 10 years for a total term was 15 years. This was our longest mortgage term since we became home owners. Our first mortgage in the US was 10 years, which we paid off in 1.5 years. The way mortgages work in the UK is very different than US. In the UK, common fixed term mortgages run either 2 years or 5 years. Once the fixed term ends, you need to sign up for another fixed term. Alternatively, you can choose to be on the variable rate. The US on the other hand allows for a single fixed rates up to 30 years. The other difference worth mentioning is the amount of over-payment towards the principal. In the UK, you are allowed over-payments up to 10% of the outstanding balance each calendar year. Any over-payment above that will result in a penalty. There was no such penalty when we had our US mortgage (not sure if this has changed since then).

When our mortgage started in November 2022, we made our first over-payment the same month to meet 2022 quota. We did the same in January 2023, to meet the 2023 quota at the earliest date to gain maximum interest reduction. In late-October 2023, about a week before our next payment was due, we received a letter from Lloyds. It stated that our monthly payment, from November 2023, would be dropped by 10%. This was part of their annual mortgage evaluation. Apparently, the bank wanted us to have lower monthly payments. They also wanted to make sure we still can afford our payment. Lloyds, rather sneakily, tried to force us to remain at the same total interest paid over the life of the mortgage.

The call with with Lloyds mortgage advisor started like this –

Lloyds Mortgage Advisor: Hello, how many I help you?

Us: Please increase our mortgage back to normal amount, and reduce the term time of the mortgage.

Lloyds Mortgage Advisor: Before we do that, we need to ensure you can meet the new higher monthly payment.

Us: But it is not a new higher amount. It is the original amount, and nothing has changed on our end financially.

And so continued the 2 hour call to re-evaluate our financial status, upload to the bank portal all document evidence of paycheck, child financial responsibilities, and almost anything they requested. They try to educate us about mortgage affordability, risk of overpayment and maintaining same payment, additional mortgage insurance, and financial doom. At then end of the call I was assured by the mortgage advisor that this process was not needed next year. Come October 2024 and we had to have the exact same conversation. I am fully expecting to have 3 more conversations with Lloyds until our fixed term runs out.

And we learnt every bank does this apparently! That is ridiculous. Nobody would make and over-payment, with the objective of losing the same money on interest.

For those who prefer to see numbers, here is an example –

Loan: £200,000 ; interest 5% and term 15 years starting in January. You will pay monthly £1,581 with a total interest of £84,685 over 15 years.

If you make a one time payment of £20,000 in January after the loan starts, the bank reduces your monthly payments due to the overpayment, and it will come to £1,423 over 15 years since the bank is maintaining the term time. The £20,000 you put will go towards principle, but the bank sneakily is acting in its best interest here. It shows a lower payment to you making you feel happy, but a lower portion of the lower payment goes towards principal and you don’t save a lot of interest. The interest you pay will be lower than not overpaying. You will pay an interest of £76,217 over 15 years.

If you call the bank and ask them to keep the same monthly payment after you made the over payment, you will pay off the loan in 12 years and 11 months for a total interest of £64,680. This is a whooping savings which the bank wants you to jump thru hoops to get.