Money Helpdesk: Take care when borrowing back mortgage overpayments

However, unlike other mortgage providers who allow an unrestricted borrow-back facility, there seems to be a lack of transparency as to the exact criteria I have to meet in order to allow any overpayments to be "borrowed back" should the need arise. What do you advise?

John Postlethwaite at Punter Southall writes:

Because interest rates are so low at the moment, many lenders are actively encouraging borrowers to overpay on their mortgages. Lloyds TSB, for example, has temporarily increased the amount you can overpay to its variable rate loans, even if you are subject to an early redemption charge, from 10per cent to 20 per cent of the balance.

Many borrowers are paying their lender's standard variable rate with no early redemption charges at all, which gives them total freedom to overpay.

However, it is generally only specific "flexible" mortgages that allow you to draw back any overpayments. Lenders such as Abbey, Alliance & Leicester, Northern Rock and Clydesdale Bank currently offer this type of loan.

The terms and conditions for "borrowing back" funds would generally be set out in your mortgage offer and conditions when you originally applied.

Care should be taken when overpaying a mortgage unless you do have a flexible scheme that allows you to redraw funds; you should not use funds that you will need at a future time.

In the majority of cases, once paid into the mortgage, additional funds are used to reduce the capital and either shorten the term of the mortgage or lower the monthly payments.

Therefore, once paid into the loan, they cannot be automatically borrowed back when desired. Depending on your lender, an overpayment of between 500 and 1,000 can be treated in this manner.

If you make additional monthly overpayments below these levels they may not be treated in the same way as a lump sum payment, but can be seen as a "credit" on the mortgage account.

Although they reduce the interest you are being charged straight away, these "advance" payments may be building up a reserve fund that could be used to finance a payment holiday in the future if the need arises but, again, cannot generally be drawn back as a capital lump sum to be used elsewhere.

You should check with your lender regarding their particular policy.