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  • FIRST POST
    • jamesrguk
    • By jamesrguk 10th Sep 17, 1:24 PM
    • 3Posts
    • 1Thanks
    jamesrguk
    Mortgage Renewal: Reduce period or Over Pay?
    • #1
    • 10th Sep 17, 1:24 PM
    Mortgage Renewal: Reduce period or Over Pay? 10th Sep 17 at 1:24 PM
    We are just about to renew/remortgage our house as our 5-year fixed rate is coming to an end, this is a straight repayment mortgage covering interest & capital.

    Rates have come down from when we fixed so we can fix for another 5-years (our preferred option), with a lower monthly payment, so we have a couple of options.

    Option 1) We reduce the outstanding duration from 20-years to 16 years and maintain the same monthly payment (saving money on the interest).

    Option 2) Stick with 20 years but leave our standing order as-is, effectively overpaying every month, which is below the maximum over-payment threshold and so will incur no extra charges.

    Either option makes no difference in terms of the interest rate, and our monthly outgoing.

    Option 1 gives us the fuzzy feeling of knowing our Mortgage is 4 years closer to being paid off.

    Option 2 allows us to have access to the overpaid money if we required emergency funds (unlikely due to other savings but you never know), and I understand that the over payment is taken of the capital and avoids interest.

    Can anyone see any benefit to one option over the other? comments welcome.

    James & Jane
Page 1
    • ProDave
    • By ProDave 10th Sep 17, 1:45 PM
    • 268 Posts
    • 331 Thanks
    ProDave
    • #2
    • 10th Sep 17, 1:45 PM
    • #2
    • 10th Sep 17, 1:45 PM
    Option 2 all the way.

    It gives you flexibility to over pay when you can afford it, and if you manage to keep up the overpayments the mortgage will finish sooner. But unlike option 1, it gives you the flexibility to reduce payments should your circumstances change, and claw back the over paid money if you need to.
    • G_M
    • By G_M 10th Sep 17, 1:59 PM
    • 41,087 Posts
    • 47,233 Thanks
    G_M
    • #3
    • 10th Sep 17, 1:59 PM
    • #3
    • 10th Sep 17, 1:59 PM
    Option 2 also gives you "the fuzzy feeling of knowing our Mortgage is 4 years closer to being paid off" assuming you maintain the over-payments.

    Plus allows you to take ayment holidays in future if you ever need to.
    • phillw
    • By phillw 10th Sep 17, 3:37 PM
    • 827 Posts
    • 418 Thanks
    phillw
    • #4
    • 10th Sep 17, 3:37 PM
    • #4
    • 10th Sep 17, 3:37 PM
    Option 1 gives us the fuzzy feeling of knowing our Mortgage is 4 years closer to being paid off.

    Option 2 allows us to have access to the overpaid money if we required emergency funds (unlikely due to other savings but you never know), and I understand that the over payment is taken of the capital and avoids interest.
    Originally posted by jamesrguk
    Option 3, increase the term but still keep paying the same amount.

    It comes down to predicting the future. If you think you are always going to have spare cash then pick the shortest time. If you think you might have your pay cut or your costs rise for some reason, then choose a longer time.

    Predicting the future is hard.
    • motherofstudents
    • By motherofstudents 10th Sep 17, 3:56 PM
    • 1,295 Posts
    • 1,641 Thanks
    motherofstudents
    • #5
    • 10th Sep 17, 3:56 PM
    • #5
    • 10th Sep 17, 3:56 PM
    Search on this site for "mortgage overpayment calculator" so you can play around with some actual figures. It helped me to decide how best to pay off the mortgage.
    • kingstreet
    • By kingstreet 10th Sep 17, 4:59 PM
    • 31,939 Posts
    • 17,070 Thanks
    kingstreet
    • #6
    • 10th Sep 17, 4:59 PM
    • #6
    • 10th Sep 17, 4:59 PM
    To reduce the term you will have to endure your lender's advice process; whereas remaining on the same term and overpaying voluntarily, you can do an execution-only product transfer/customer retention product, probably online.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
    • Dorian1958
    • By Dorian1958 11th Sep 17, 9:00 AM
    • 72 Posts
    • 37 Thanks
    Dorian1958
    • #7
    • 11th Sep 17, 9:00 AM
    • #7
    • 11th Sep 17, 9:00 AM
    Another option worth considering, depending upon your personal circumstances, would be to use the money saved to boost your pension arrangements, instead of reducing the term or overpaying. I know this implies taking a long term view, but this could be much more financially advantageous, especially if you are 40% tax payers.
    • cjdavies
    • By cjdavies 11th Sep 17, 9:10 AM
    • 2,586 Posts
    • 2,530 Thanks
    cjdavies
    • #8
    • 11th Sep 17, 9:10 AM
    • #8
    • 11th Sep 17, 9:10 AM
    I'm option 2, some months I overpay and others I don't when I need the extra £.
    • steampowered
    • By steampowered 11th Sep 17, 10:10 AM
    • 1,694 Posts
    • 1,619 Thanks
    steampowered
    • #9
    • 11th Sep 17, 10:10 AM
    • #9
    • 11th Sep 17, 10:10 AM
    Another option worth considering, depending upon your personal circumstances, would be to use the money saved to boost your pension arrangements, instead of reducing the term or overpaying. I know this implies taking a long term view, but this could be much more financially advantageous, especially if you are 40% tax payers.
    Originally posted by Dorian1958
    This.

    Before making a decision on the mortgage, it would be a good time to review your pension arrangements. The tax relief plus investment returns on a pension are likely to vastly exceed the interest paid on a mortgage. Put some numbers into the pension calculator on the moneyadviceservice website.
    • kinger101
    • By kinger101 11th Sep 17, 10:42 AM
    • 3,817 Posts
    • 5,211 Thanks
    kinger101
    Another option worth considering, depending upon your personal circumstances, would be to use the money saved to boost your pension arrangements, instead of reducing the term or overpaying. I know this implies taking a long term view, but this could be much more financially advantageous, especially if you are 40% tax payers.
    Originally posted by Dorian1958
    I'm another that thinks this is needs serious consideration. Even at basic rate, given today's low interest rates, I think although not without risk, performance is likely to be better than mortgage overpayments in the long term.
    • x-caitlin-x
    • By x-caitlin-x 11th Sep 17, 12:15 PM
    • 224 Posts
    • 202 Thanks
    x-caitlin-x
    Option 2 is basically what we're doing. We're FTB, going for the longest mortgage term we can get to keep the mortgage payment low, but then overpaying to keep our monthly payment the same as it is now. By overpaying we're still saving on interest, but if the worst should happen and we get into financial trouble, our obligations won't be quite so high. You're saving money on the interest either way, and if you keep religiously to the overpayments then you're still paying off your mortgage 4 years early.

    Definitely go with Option 2, unless you take the advice above and consider your pension arrangements (I can't advise on that!)
    • SuzieSue
    • By SuzieSue 11th Sep 17, 2:50 PM
    • 3,652 Posts
    • 3,956 Thanks
    SuzieSue
    I'm another that thinks this is needs serious consideration. Even at basic rate, given today's low interest rates, I think although not without risk, performance is likely to be better than mortgage overpayments in the long term.
    Originally posted by kinger101
    Yes, but make sure you have some sort of income protection (look up Permanent Health Insurance) should you become ill and are unable to work. Lots of people don't realise until it is too late that the State will not help them with their mortgage if they become ill or unemployed.

    I agree that pension contributions are important and everyone should pay in to a pension when they start work. However, the roof over your head is just as important and the importance of paying off your mortgage as soon as you can should not be underestimated (especially when interest rates are low).
    Last edited by SuzieSue; 11-09-2017 at 2:59 PM.
    • AnotherJoe
    • By AnotherJoe 11th Sep 17, 3:15 PM
    • 7,244 Posts
    • 7,755 Thanks
    AnotherJoe
    Yes, but make sure you have some sort of income protection (look up Permanent Health Insurance) should you become ill and are unable to work. Lots of people don't realise until it is too late that the State will not help them with their mortgage if they become ill or unemployed.

    I agree that pension contributions are important and everyone should pay in to a pension when they start work. However, the roof over your head is just as important and the importance of paying off your mortgage as soon as you can should not be underestimated (especially when interest rates are low).
    Originally posted by SuzieSue
    And that points to Option 2 as well, though as intimated by a few posters, if you are a 40% taxpayer, more money into pension is a better financial deal.
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