Mortgage overpayment - reduce payments or reduce term?
Discussion
Just about the make the maximum 10% overpayment allowed for this year (01/01/11 - 31/12/11)
We are just under a year into the 25 year term.
Need to elect to reduce the monthly payments or reduce the term.
Given that we hope that the mortgage is paid off long before the original term, or that several remortgages will take place to keep to a competetive rate, are there any downsides to reducing the term at this stage, or should we reduce the repayment and save the cash towards next year's 10% overpayment?
We are just under a year into the 25 year term.
Need to elect to reduce the monthly payments or reduce the term.
Given that we hope that the mortgage is paid off long before the original term, or that several remortgages will take place to keep to a competetive rate, are there any downsides to reducing the term at this stage, or should we reduce the repayment and save the cash towards next year's 10% overpayment?
Thread resurrection but.... Why is it better to reduce the term rather than monthly payment?
Is it due to the amount of interest paid or just that the feeling to pay off sooner is better?
Overpaying either way must be good; is overpaying and reducing term financially better thsn overpaying and benefitting from reduced monthly payment?
Is it due to the amount of interest paid or just that the feeling to pay off sooner is better?
Overpaying either way must be good; is overpaying and reducing term financially better thsn overpaying and benefitting from reduced monthly payment?
Because if you reduce the term, the payment stays the same, you pay the mortgage off quicker and you see the benefit at the end of the mortgage when it's paid off before it should have been.
If you reduce the payment, there is no benefit at the end, it finishes no earlier, but your payment has been reduced by a very small amount, that probably had no material benefit to you over the period of your mortgage.
If you reduce the payment, there is no benefit at the end, it finishes no earlier, but your payment has been reduced by a very small amount, that probably had no material benefit to you over the period of your mortgage.
I've been overpaying on and off the last 9 years and I've always just left the term at the original.
I prefer the reduced payments, as it gives greater flexibility over what you do with your money. Now that interest rates on savings exceed the rate on my Mortgage, of course I don't actually make any overpayments these days until that situation reverses.
I prefer the reduced payments, as it gives greater flexibility over what you do with your money. Now that interest rates on savings exceed the rate on my Mortgage, of course I don't actually make any overpayments these days until that situation reverses.
But what's the point in making the maximum over-payment if you then reduce the monthly payment? Presumably you would pay off more than the max, but then you reduce the overall amount you can repay in the year.
This is one of the reasons I've always had an offset mortgage, once you start over-paying you can essentially decide what your repayment amount is each month and you have the freedom to change your mind down the line or take some back if you need to.
This is one of the reasons I've always had an offset mortgage, once you start over-paying you can essentially decide what your repayment amount is each month and you have the freedom to change your mind down the line or take some back if you need to.
paulrockliffe said:
But what's the point in making the maximum over-payment if you then reduce the monthly payment? Presumably you would pay off more than the max, but then you reduce the overall amount you can repay in the year.
This is one of the reasons I've always had an offset mortgage, once you start over-paying you can essentially decide what your repayment amount is each month and you have the freedom to change your mind down the line or take some back if you need to.
I agree.This is one of the reasons I've always had an offset mortgage, once you start over-paying you can essentially decide what your repayment amount is each month and you have the freedom to change your mind down the line or take some back if you need to.
Also 'reducing the term and all that is only relevant to people who are not going to change their mortgage any time soon.
Keeping some money as rainy day savings until it's time to remortgage is often sensible.
Putting spare in your pension is often sensible.
When you've had a mortgage through say 10 years of inflation and promotions etc, then it's time to wonder if you could comfortably pay it off much sooner, while still saving/investing elsewhere.
OTOH, if you're expecting your earnings/disposable to drop (e.g. having kids) then pay it off while the goings good and reduce your commitments a few years down the line if that works for you.
paulrockliffe said:
This is one of the reasons I've always had an offset mortgage, once you start over-paying you can essentially decide what your repayment amount is each month and you have the freedom to change your mind down the line or take some back if you need to.
The same. You then have complete flexibility. I have 7 years left on my Santander flexi interest only mortgage, which was originally a 17 year term, but got an email today to say that with the current interest rates pushing my monthly up to £850 or so a month, my mortgage will be paid in 11 months.
The £200k odd is sat in an offset savings account with them. I wasn't actually sure what happened at the end, I guess if you pay more into the offset account than the mortgage account they just pay it off? I will call them when I get time and find out.
Anyway, it was nice to get that email.
Having that money sat in an offset account meant I was far happier to pay money in, knowing I could take it back out whenever I wanted, and it wasn't just tied up in the property, if it had been a regular mortgage I wouldn't have kept throwing money in there.
Elysium said:
Interest only offset mortgages seem to be rare these days.
I agree. But they are not a bad option.
As I said...
Having that money sat in an offset account meant I was far happier to pay money in, knowing I could take it back out whenever I wanted, and it wasn't just tied up in the property, if it had been a regular mortgage I wouldn't have kept throwing money in there.
Knowing I could take it back out meant I was happy to pay extra it in.
Now, some 10 years later I am thinking how nice it is to have paid my mortgage off early. Not something I would have done if I had not known I could get those savings back.
deutsche.diagnostics said:
Elysium said:
Interest only offset mortgages seem to be rare these days.
I agree. But they are not a bad option.
As I said...
Having that money sat in an offset account meant I was far happier to pay money in, knowing I could take it back out whenever I wanted, and it wasn't just tied up in the property, if it had been a regular mortgage I wouldn't have kept throwing money in there.
Knowing I could take it back out meant I was happy to pay extra it in.
Now, some 10 years later I am thinking how nice it is to have paid my mortgage off early. Not something I would have done if I had not known I could get those savings back.
I had a Santander tracker mortgage, went down as low as 0.6% , I had savings of 170k which were earning nothing, so decided to pay the whole lot off, thinking it would be the best feeling ever.
What a let down, I transferred the money over, walked into the lounge and told the wife, and that was that.
The only positive to come out of it was that rates rose, so instead of £925 a month I’d have now been paying £1200 a month, and what money I’m now managing to save is earning me 4-5% interest, so not all bad.
What a let down, I transferred the money over, walked into the lounge and told the wife, and that was that.
The only positive to come out of it was that rates rose, so instead of £925 a month I’d have now been paying £1200 a month, and what money I’m now managing to save is earning me 4-5% interest, so not all bad.
This thread has confused me. What is the point in reducing the term, say from 20 years to 15? Surely all that matters is the fixed rate term, because every 2/3/5 years you’re going to change mortagage anyway.
Isn’t the best thing to do to have a longer term then overpay the capital each month, so you’re paying less interest during the 2/3/5 year of your term? When getting a fixed rate mortgage/
Please correct me if I am wrong as that’s exactly what I plan. Officially I have 16 years remaining and 250k outstanding balance. When I need to re-mortgage this year, I’ll change the term to 25 years to get a lower monthly amount (and thus paying less amount in interest each month) and then overpay the maximum each month - which would equal 25k a year in overpayment if I’m allowed 10% overpayments. Please let me know if I’m completely wrong here, in what I’m about to do
Isn’t the best thing to do to have a longer term then overpay the capital each month, so you’re paying less interest during the 2/3/5 year of your term? When getting a fixed rate mortgage/
Please correct me if I am wrong as that’s exactly what I plan. Officially I have 16 years remaining and 250k outstanding balance. When I need to re-mortgage this year, I’ll change the term to 25 years to get a lower monthly amount (and thus paying less amount in interest each month) and then overpay the maximum each month - which would equal 25k a year in overpayment if I’m allowed 10% overpayments. Please let me know if I’m completely wrong here, in what I’m about to do
Seventyseven7 said:
This thread has confused me. What is the point in reducing the term, say from 20 years to 15? Surely all that matters is the fixed rate term, because every 2/3/5 years you’re going to change mortagage anyway.
Isn’t the best thing to do to have a longer term then overpay the capital each month, so you’re paying less interest during the 2/3/5 year of your term? When getting a fixed rate mortgage/
Please correct me if I am wrong as that’s exactly what I plan. Officially I have 16 years remaining and 250k outstanding balance. When I need to re-mortgage this year, I’ll change the term to 25 years to get a lower monthly amount (and thus paying less amount in interest each month) and then overpay the maximum each month - which would equal 25k a year in overpayment if I’m allowed 10% overpayments. Please let me know if I’m completely wrong here, in what I’m about to do
If you overpay and reduce the term you will save thousands in interest. Isn’t the best thing to do to have a longer term then overpay the capital each month, so you’re paying less interest during the 2/3/5 year of your term? When getting a fixed rate mortgage/
Please correct me if I am wrong as that’s exactly what I plan. Officially I have 16 years remaining and 250k outstanding balance. When I need to re-mortgage this year, I’ll change the term to 25 years to get a lower monthly amount (and thus paying less amount in interest each month) and then overpay the maximum each month - which would equal 25k a year in overpayment if I’m allowed 10% overpayments. Please let me know if I’m completely wrong here, in what I’m about to do
Seventyseven7 said:
This thread has confused me. What is the point in reducing the term, say from 20 years to 15? Surely all that matters is the fixed rate term, because every 2/3/5 years you’re going to change mortagage anyway.
Isn’t the best thing to do to have a longer term then overpay the capital each month, so you’re paying less interest during the 2/3/5 year of your term? When getting a fixed rate mortgage/
Please correct me if I am wrong as that’s exactly what I plan. Officially I have 16 years remaining and 250k outstanding balance. When I need to re-mortgage this year, I’ll change the term to 25 years to get a lower monthly amount (and thus paying less amount in interest each month) and then overpay the maximum each month - which would equal 25k a year in overpayment if I’m allowed 10% overpayments. Please let me know if I’m completely wrong here, in what I’m about to do
That is not the way to do it. You would be better off interest only if that is your plan - low running cost and then overpay. A 25 yr term is front loaded with interest so you would be paying lass capital and more interest with a term of 25 yrs than a 15 yr term (I am a mortgage broker)Isn’t the best thing to do to have a longer term then overpay the capital each month, so you’re paying less interest during the 2/3/5 year of your term? When getting a fixed rate mortgage/
Please correct me if I am wrong as that’s exactly what I plan. Officially I have 16 years remaining and 250k outstanding balance. When I need to re-mortgage this year, I’ll change the term to 25 years to get a lower monthly amount (and thus paying less amount in interest each month) and then overpay the maximum each month - which would equal 25k a year in overpayment if I’m allowed 10% overpayments. Please let me know if I’m completely wrong here, in what I’m about to do
Seventyseven7 said:
I’ll change the term to 25 years to get a lower monthly amount (and thus paying less amount in interest each month).....
The interest will be the same no matter what the term is, you pay the interest on the amount outstanding each month. If you stretch the term longer you will be paying more interest. Seventyseven7 said:
I
.....and then overpay the maximum each month - which would equal 25k a year in overpayment if I’m allowed 10% overpayments. Please let me know if I’m completely wrong here, in what I’m about to do
If you are going to over pay however, you will be paying less interest, as long as it is not front loaded! .....and then overpay the maximum each month - which would equal 25k a year in overpayment if I’m allowed 10% overpayments. Please let me know if I’m completely wrong here, in what I’m about to do
The way you are doing it will mean you have more of a buffer if you have a period where you can't pay. Just make sure you do make the overpayments.
You will be mortgage free within 8 years or so if you do.
It is not a bad idea to always try and leave yourself 18 months of the mortgage payments in savings rather than tied up in the house. Just in case.
Some mortgages will allow you to have a payment holiday up to the amount you have over payed, which can take pressure off if something unexpected happens.
Like above, I chose a 0.25% above base lifetime tracker because my deal had run out and that was the only free deal with no ties to it, and I could self cert it over the phone (those were the days!) this was 2008. I presumed I would switch to a 'proper deal' when we knew if we were staying in that place or moving.
Within months we were down from 5% odd to 0.5%.
We went from paying £1200 a month in interest to under £200 within 6 months or so.
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