'Don't shorten your mortgage term if you can overpay' blog discussion

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  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
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    womble12345 wrote: »
    Nationwide allow me a maximum overpayment of £500 per month and i am already at that limit each month and seeing as the " reducing monthly payment option " relies on me increasing my overpayment by the amount that my monthly payment reduces each month then it does seem like i will be better off reducing my term if i feel i could always afford my existing monthly payment.
    I agree with you completely.
    If you can afford the current monthly repayments if interest rates go up, etc, then you're definitely better reducing your term if you can't make further overpayments.
  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
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    Mobeer wrote: »
    The person Martin refers to has a very flexible mortgage. My previous mortgage provider was more like that mentioned by womble12345. An extra payment either:
    1) reduced the monthly payment, such that the mortgage was paid off at the original planned date
    2) reduced the mortgage term, such that the mortgage payment remained unchanged

    There was no concept of the more flexible idea of keeping the term unchanged, keeping the monthly payment unchanged but paying off more than that monthly payment.
    Even so, unless you were in a position like womble12345 where you couldn't make further overpayments, you could have kept the term the same, reduced your monthly payments and increased your overpayments.
  • R34GTT
    R34GTT Posts: 424 Forumite
    In Womble's situation reducing the term is the best option because it is only reducing the term by say, 1 month each time they overpay alongside the fact they can only overpay their maximum of £500 per month. That is different to requesting a reduced term that matches the maximum monthly payment affordable as in Martin's blog, which would result in a permanently higher monthly payment.

    If Womble cannot afford an overpayment next month that is no problem as the remaining monthly payments over the incrementally reduced term are no bigger than previously.
  • Mobeer
    Mobeer Posts: 1,851 Forumite
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    JimmyTheWig wrote: »
    Even so, unless you were in a position like womble12345 where you couldn't make further overpayments, you could have kept the term the same, reduced your monthly payments and increased your overpayments.

    Maybe. The actual maths are a bit more complicated because my less flexible mortgage only allowed an overpayment in December. So if I one overplayed in one December and reduced payments, then money saved each month actually had to be kept in a savings account until the following December. In the interim the mortgage balance would be higher and payment lower than if I had chosen a reduced term, which would lead to more interest being charged.

    ----
    Actually thought of another issue to consider if your mortgage is not totally flexible _ beware early repayment charges. If I overpaid more than a certain amount then the extra overpayments incurred a early repayment charged.
  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
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    Mobeer wrote: »
    Maybe. The actual maths are a bit more complicated because my less flexible mortgage only allowed an overpayment in December. So if I one overplayed in one December and reduced payments, then money saved each month actually had to be kept in a savings account until the following December. In the interim the mortgage balance would be higher and payment lower than if I had chosen a reduced term, which would lead to more interest being charged.
    I agree, though depending on your mortgage interest rate and your savings interest rate this is likely to be a very small difference. Which is what I believe Martin is refering to when he says
    (I say similar and not exactly the same as timing issues and when the interest is calculated can have a small impact)
    You could set up a regular savings account for the money which is likely to beat the mortgage interest rate.
    Actually thought of another issue to consider if your mortgage is not totally flexible _ beware early repayment charges. If I overpaid more than a certain amount then the extra overpayments incurred a early repayment charged.
    ERCs are almost never worth paying. When I consider "ability to make overpayments on a mortgage" I mean "without incurring ERCs".
  • themac007
    themac007 Posts: 5 Forumite
    I switched my fixed rate to a flexi and use the difference (£110 per month currently) to overpay with. Win win :)
  • Million_Percent
    Million_Percent Posts: 188 Forumite
    I think what some of the examples here show is that the decision is not clear cut and every case is different depending on the specific terms of the mortgage.

    I agree with JimmyTheWig that if you have complete flexibility on your payments then you should choose to reduce the monthly payment and keep the term as is but then increase your overpayment to compensate. This option always gives you the ability to stop the overpayments and just pay the lower minimum payment if needs be.
  • jedimonkey
    jedimonkey Posts: 110 Forumite
    womble12345 wrote: »
    My mortgage provide is nationwide and the default behaviour of an overpayment is to reduce the monthly payment, i will get it changed.


    You may find the info here useful: http://www.nationwide.co.uk/support/support-articles/manage-your-account/mortgage-overpayments#xtab:repayment-capital-and-interest-fixed
    I am a Jedi Monkey
    You should note that this site doesn't check my status as a Jedi Monkey, so you need to take my word for it. This signature is here as I follow the Jedi Code of Conduct. Any posts on here are for discussion purposes only and shouldn't be seen as monkey madness.
  • JulieGeorgiana
    JulieGeorgiana Posts: 2,475 Forumite
    Debt-free and Proud!
    I have a question:

    I overpay monthly, and each year the bank automatically reduces my monthly payment to keep the term the same (I am not allowed to opt out of this). So I just increase my overpayment by the amount they have reduced.

    Overall am I saving money by overpaying if they keep lowering my payments?

    I think I am (which is why I keep overpaying) but am I?
    We spend money we don't have, on things that we don't need, to impress people we don't like. I don't and I'm happy!
    :dance: Mortgage Free Wannabe :dance:
    Overpayments Made: £5400 - Interest Saved: £11,550 - Months Saved: 24
  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
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    JulieGeorgiana wrote: »
    I have a question:

    I overpay monthly, and each year the bank automatically reduces my monthly payment to keep the term the same (I am not allowed to opt out of this). So I just increase my overpayment by the amount they have reduced.

    Overall am I saving money by overpaying if they keep lowering my payments?

    I think I am (which is why I keep overpaying) but am I?
    Yes you are saving money doing it this way.
    You are also keeping your minimum repayment low (which is a good thing, as per Martin's blog entry, if circumstances change in the future).
    And if I understand correctly that the monthly overpayments you make are automatically taken from your bank, you are _also_ ensuring you don't choose to not overpay some months with no valid reason.

    This set up sounds perfect!
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