Overpayment - reducing monthly payment or term?

gaia66 · 10 March 2017 at 11:07AM

I have a fixed rate (2.69%) mortgage with 16 years remaining. I have 74.000 left to pay and my fixed term comes to an end in 2020. My monthly payment is £ 478. I am self-employed and by the time that my fixed rate term is finished my income is likely to have gone down - I can already see it for the next tax year, due to a combination of failing health and loss of two major clients. Of course it may no be as bad as I think, and I am looking at the worse case scenario here.

I have 30.000 in savings and I would like to put some of it towards the mortgage, which allows 10% overpayment. I was considering making a £7400 lump sum payment now, and I can't make up my mind if it would be better for me to ask for term reduction or lower the monthly payments (which I can afford right now). I suppose my aim is to reduce the total amount by the time I come to the end of the fixed term, so that I can ask for a better deal even if my income has gone down.
Any advice or opinion appreciated!

Mogley · 10 March 2017 at 12:31PM

1) What is the value of your house and expected LTV when you come to re-mortgage in 2020 if you didn't overpay?
2) Consider if you can make more in interest on your savings than overpaying the mortgage especially if your LTV will be less than 60% when answering 1).
Money in savings is then not just limited to use on the mortgage. It can be used flexibly for other expenses but could be used on the mortgage if you'd prefer.
3) Once your fixed rate mortgage term is finished you could use those savings to overpay as much as you like whilst on SVR then re-mortgage to a deal that suits you and your income. Or your circumstances could mean that you could just keep the savings at this point.
4) If you still would like to overpay now because you want to reduce your LTV, my opinion is you should choose the option to reduce your payment. Be smart and put the money you save as a result of the monthly payment reduction directly into savings to help protect you from the risks you say you may have in the future.

dimbo61 · 10 March 2017 at 5:09PM

Are your savings earning more than 2.69% after tax ?
Paying 10% off the mortgage debt now means a lower mortgage payment each month.
You will still have £23,000 in savings.

trailingspouse · 10 March 2017 at 7:44PM

If you can afford the monthly payments at the moment, I would go for reducing the term. In the future, you may no longer be able to make the payments, so working towards not having to make those payments at all makes sense to me.

usefulmale · 10 March 2017 at 8:15PM

This is my own situation.

I have made a few lump-sum overpayments and I overpay £50 every month. Just by doing that, I have (unofficially) reduced the term.

My repayments have been reduced. However, I have just kept the standing order at the old level plus the 50 overpayment.

Way I see it is, if you reduce the term, your minimum monthly repayments will rise and, if interest rates should go up, or your income goes down, that may become unaffordable.

As it is for me right now, I have a buffer of what the minimum payment required is, plus the old payment level plus the 50 I'm overpaying, to cover any interest rate rises or reduction of income.

SG27 · 10 March 2017 at 9:09PM

Reduce the payment but ask to keep your direct debit the same thereby making a regular overpaymebt by the amount of the reduction.

This way the term will reduce as the mortgage will be repaid earlier but if your income drops in future you can remove the regular overpayment and pay the reduced monthly payment.

gaia66 · 11 March 2017 at 9:43AM

That sounds good but I am not sure I can do that. From the conversation I had with the bank I will have to instruct them if I want one option or the other a few days after I made the lump sum payment.

usefulmale wrote: »

This is my own situation.

I have made a few lump-sum overpayments and I overpay £50 every month. Just by doing that, I have (unofficially) reduced the term.

My repayments have been reduced. However, I have just kept the standing order at the old level plus the 50 overpayment.

Way I see it is, if you reduce the term, your minimum monthly repayments will rise and, if interest rates should go up, or your income goes down, that may become unaffordable.

As it is for me right now, I have a buffer of what the minimum payment required is, plus the old payment level plus the 50 I'm overpaying, to cover any interest rate rises or reduction of income.

gaia66 · 11 March 2017 at 9:49AM

The LTV without overpayment and with the market value at the moment would be 20%
My savings at the moment are generating no interest whatsoever ...that is my next homework to do.
Your advice is what the bank advisor told me to do as well.
Thank you

Mogley wrote: »

1) What is the value of your house and expected LTV when you come to re-mortgage in 2020 if you didn't overpay?
2) Consider if you can make more in interest on your savings than overpaying the mortgage especially if your LTV will be less than 60% when answering 1).
Money in savings is then not just limited to use on the mortgage. It can be used flexibly for other expenses but could be used on the mortgage if you'd prefer.
3) Once your fixed rate mortgage term is finished you could use those savings to overpay as much as you like whilst on SVR then re-mortgage to a deal that suits you and your income. Or your circumstances could mean that you could just keep the savings at this point.
4) If you still would like to overpay now because you want to reduce your LTV, my opinion is you should choose the option to reduce your payment. Be smart and put the money you save as a result of the monthly payment reduction directly into savings to help protect you from the risks you say you may have in the future.

lopsyfa · 11 March 2017 at 11:30AM

SG27 wrote: »

Reduce the payment but ask to keep your direct debit the same thereby making a regular overpaymebt by the amount of the reduction.

This way the term will reduce as the mortgage will be repaid earlier but if your income drops in future you can remove the regular overpayment and pay the reduced monthly payment.

You have to be careful with that advice. If the OP makes £7400 over-payment now, any extra over-payment above the new monthly payment will be class as an over-payment above the 10% and may incur ERC.

I agree the best option for the OP is probably to make the £7400 overpayment while keeping the term the same in case income drops in the future so the new payment is more affordable. The term can always be reduced sometimes in the future if things end up working better.

And like others have said, open multiple accounts paying 3%+ and stash the money there. In essence, you are offsetting the interest payment on the mortgage with the interest you earn on your savings account. You just need to be discipline not to spend the money on luxury (new car etc.). Banks paying good interest include TSB (4% on up to £2000, £250 monthly can earn 5% in their monthly savings account), Lloyds (used to be 3% for balance between £4000 -£5000 and they also have a monthly savers with high interest) and there are other banks too in the forum. So you can easily put the £23k earing more than the mortgage interest.

Overpayment - reducing monthly payment or term?

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