Reduce term or lower the payments

PhilStation · 21 July 2017 at 1:02PM

Our 2 yr fix is coming up in the next few months, we have / will have an O/S balance of around £145k on a property worth roughly £240k.

Our incomes have taken a hit with the arrival of my son as my wife now only works part time. We get by thanks to all my schemes (as the wife calls them) which mostly involve current account switches, cashback sites, cashback credit cards and Tesco points. We will both be looking at modest pay rises in the next year (I work in the public sector so 1%) plus any extra from the increase in the tax allowance.

At the moment, I am trying to decide whether to;

a) Reduce the term by 2-3 years (we have 21yrs left) which at current interest rates will keep our payments flat, give or take a few pounds.

b) Stick with the 21 year term, bank the extra and try to make over payments.

Any thoughts would be welcome.

Thrugelmir · 21 July 2017 at 1:10PM

Interest rates may well rise over the next 21 years. To retain flexibility you'd be better off keeping the mortgage term as is. Then overpaying by what you can reasonably afford / is within the limits of the mortgage product. A couple of % would increase your fixed monthly outgoings considerably. By overpaying now you'll be protecting yourself from the potential shock.

clairebeth · 21 July 2017 at 1:12PM

I would go with option B. You can still overpay and reduce the term where possible, but if the !!!! hits the fan, you are not committed to the larger payment. They may not approve a shorter term based on affordability anyway?

AnotherJoe · 21 July 2017 at 1:14PM

(b) as Thrugelmir says so you arent locked in to any one option

PhilStation · 21 July 2017 at 1:17PM

Thrugelmir wrote: »

Interest rates may well rise over the next 21 years. To retain flexibility you'd be better off keeping the mortgage term as is. Then overpaying by what you can reasonably afford / is within the limits of the mortgage product. A couple of % would increase your fixed monthly outgoings considerably. By overpaying now you'll be protecting yourself from the potential shock.

I fully expect the rates to rise, I think the main reason I am looking at the reduced term is as a way of overpaying and avoid the temptation of spending the cash that would otherwise be for the over payment's. With the fixed term, I wouldn't be at risk of a rate rise mid-term but expect it to increase at the end of the term.

PhilStation · 21 July 2017 at 1:34PM

Things have been particularly tight recently, however, I feel a corner is about to be turned, we have a new budget plan that should see us right going forward with money aside for savings, all bills covered and more importantly, giving ourselves enough to live on and enjoy life!

I think I will see how our spending goes over the next couple of months and then make a decision based on how well we have managed.

AnotherJoe · 21 July 2017 at 3:29PM

PhilStation wrote: »

I fully expect the rates to rise, I think the main reason I am looking at the reduced term is as a way of overpaying and avoid the temptation of spending the cash that would otherwise be for the over payment's. With the fixed term, I wouldn't be at risk of a rate rise mid-term but expect it to increase at the end of the term.

So just set up a standing order to take the equivalent money to a shorter term payment out of your bank immediately after your salary. That way there's no temptation to spend as the money is gone, and its set unless you take some action to chnage it, you aren't deciding every month "should i overpay" thats the default that happens with no action needed on your part. So its the same as having the shorter term but without being committed.

logie48 · 21 July 2017 at 7:14PM

PhilStation wrote: »

I fully expect the rates to rise, I think the main reason I am looking at the reduced term is as a way of overpaying and avoid the temptation of spending the cash that would otherwise be for the over payment's. With the fixed term, I wouldn't be at risk of a rate rise mid-term but expect it to increase at the end of the term.

I am in the exact situation as you (well except a daughter

) and was looking to reduce my term by 5 years.

However, I decided to keep my term the same and setup a regular overpayment with my lender, in effect bringing it down to the reduced 5 year term. Can phone up and cancel the overpayment instruction at any time, if required for emergencies.

A word of advice; for this to work, you need to instruct your lender to keep the monthly repayments the same each month and adjust the term to account for all the overpayments. If not, they keep the term the same and reduce your typical monthly repayment, which is no good to man nor beast.

PhilStation · 22 July 2017 at 11:11AM

AnotherJoe wrote: »

So just set up a standing order to take the equivalent money to a shorter term payment out of your bank immediately after your salary. That way there's no temptation to spend as the money is gone, and its set unless you take some action to chnage it, you aren't deciding every month "should i overpay" thats the default that happens with no action needed on your part. So its the same as having the shorter term but without being committed.

That sounds like a sensible way of doing things, I like it!

PhilStation · 22 July 2017 at 11:11AM

logie48 wrote: »

I am in the exact situation as you (well except a daughter ) and was looking to reduce my term by 5 years.

However, I decided to keep my term the same and setup a regular overpayment with my lender, in effect bringing it down to the reduced 5 year term. Can phone up and cancel the overpayment instruction at any time, if required for emergencies.

A word of advice; for this to work, you need to instruct your lender to keep the monthly repayments the same each month and adjust the term to account for all the overpayments. If not, they keep the term the same and reduce your typical monthly repayment, which is no good to man nor beast.

Thanks for the heads up, I'll be sure to make sure to check how it is applied.

dimbo61 · 22 July 2017 at 2:34PM

Have you got emergency savings ?
What happens if the boiler breaks down or you need a replacement car !
Why not overpay 50% and save 50%
Have you looked at Offset mortgages ?

Reduce term or lower the payments

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