Re-mortgage - shorten life of loan or overpay question?
Discussion
Probably been asked a thousand times already but I'm really struggling to get my head round this.
We were on a fixed rate mortgage which ended whilst the rates were plummeting so we opted to stick on the variable that we transferred to. However, we are both thinking it is time to maybe start thinking about re-fixing (we both like the security of knowing that if rates go up we can still afford our repayments).
When we switched to variable, we continued paying the same amount off each month, making overpayments.
So here's the question....
Is it better to remortgage and get the life of the policy down as much as possible by bumping up the repayments to as close to what we currently pay, or is it better to maintain the same life of the loan as we currently have and continue to overpay each month up to what we currently pay?
Any thoughts on which works out best in the longterm? I really struggle to figure it out as i've seen graphs previously showing that you always pay off way more interest than capital at the beginning of the loan but struggle to work it out in my head.
Thanks in advance.
We were on a fixed rate mortgage which ended whilst the rates were plummeting so we opted to stick on the variable that we transferred to. However, we are both thinking it is time to maybe start thinking about re-fixing (we both like the security of knowing that if rates go up we can still afford our repayments).
When we switched to variable, we continued paying the same amount off each month, making overpayments.
So here's the question....
Is it better to remortgage and get the life of the policy down as much as possible by bumping up the repayments to as close to what we currently pay, or is it better to maintain the same life of the loan as we currently have and continue to overpay each month up to what we currently pay?
Any thoughts on which works out best in the longterm? I really struggle to figure it out as i've seen graphs previously showing that you always pay off way more interest than capital at the beginning of the loan but struggle to work it out in my head.
Thanks in advance.
If your chosen mortgage allows unlimited overpayments (or enough to cover what you want to pay), then wisdom is to get the longer mortgage and just overpay. If you did need the extra monthly money you can just stop the overpayments, if you have the shorter term it would be impossible without remortgaging. If you are certain you could always cover the repayments then the shorter term would stop any temptation to drop the overpayments.
Edited by Gareth79 on Monday 26th July 16:38
Mathmatically, there is no difference. Gareth is right about having the longer term - this a contractual point... if you choose the shorter term then you are contracted to make the higher payments. Leave the term as is is and you have the flexibility to cease overpayments if necessary.
Check with your lender how they calculate interest. Most use the daily method but some still calculate interest annually. The subtle difference is that overpayments on an 'annual' basis only take effect once a year (usually January). If this was the case then an overpayment made in February would have no effect for 11 months. Better to save it, earn some interest (not much these days) and make the payment once a year.
If interest is calculated daily then pay off what you can as soon as you can.
Check with your lender how they calculate interest. Most use the daily method but some still calculate interest annually. The subtle difference is that overpayments on an 'annual' basis only take effect once a year (usually January). If this was the case then an overpayment made in February would have no effect for 11 months. Better to save it, earn some interest (not much these days) and make the payment once a year.
If interest is calculated daily then pay off what you can as soon as you can.
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