Overpayment query - reduce term or monthly payment?

rozzy_2

Hi, I am due to start overpaying and was wondering whether to reduce the term or reduce the monthly payment. Could somebody explain which is better and also if there is any difference in the amount of interest that I would pay over the term of the mortgage.

I was leaning more to reduce the monthly payment as then I would keep my monthly payment the same as well as overpaying therefore making my overpayments greater each time the monthly payments are recalculated.

So if i was paying £700pm + 200pm overpayment. If my monthly payment reduced to 650 the plan would be to keep my payment at 700 meaning I would be overpaying 250. I also liked this way because if I hit hard times and couldnt no longer overpay at least I could sit back on the minimum payment until I was ready to overpay again.

Sorry if this seems a stupid question but it was something that NR said I have to decide but I wanted to make sure I was choosing the best option. Thanks alot for your help

moominyak

Hi Rozzy and welcome :hello:

As I understand it, if you were only ever going to do one or the other, then reducing the term would be better as the mortgage would be paid off earlier.

However, you seem to be thinking along the same lines as me - pay as much as you can afford regardless of what the minimum payment does. To me at the moment, there doesn't seem much point in reducing the term as I'm tied in to a fixed rate for the next 3 years and I know that there's no way I'll be in a position to pay it all back at that point!

When the 3 years is up, I intend to reassess the whole picture then and see if I can bring the term down and also hopefully still be able to make some overpayments. And so on and so on until the beast is dead!

I'm sure somebody more knowledgeable than me will be along soon to tell us why I've got it all wrong!

Good luck and keep us all posted with your decision and your progress!

stevie_wonder

If you reduce the term, from say 25 to 20 years, then your MINIMUM monthly payment will increase. This figure may be the same as you are prepared to overpay on a 25 year term, but the difference is one is minimum, the other is overpayment. Just think if you can cope if your circumstances change?
Personally I'd stick with your term as it is and overpay as much as you can/want. By overpaying, your term will reduce, without the enforced minimum payment level (think rainy days, car breaking down, birthdays, other emergencies)

rozzy_2

Thankyou very much for the reply Moominyak. MFW Seems a much freindlier sub board compared to some of the others so definately intend to stick around.

The position I am in is that I took out a together mortgage last year which was 100% of the value of the home. Stupid I know but it was the only way I could move out of home and afford all the furniture etc. Luckily i have 3 1/2 years before I need to remortgage so am wising up to the fact that I need to overpay as much as possible within this time in hope that I have enough equity to enable me to remortgage. Plus it will be nice to get rid of this debt looming over me asap.

Good luck in your quest to become MF.

rozzy_2

stevie_wonder wrote: »

If you reduce the term, from say 25 to 20 years, then your MINIMUM monthly payment will increase. This figure may be the same as you are prepared to overpay on a 25 year term, but the difference is one is minimum, the other is overpayment. Just think if you can cope if your circumstances change?
Personally I'd stick with your term as it is and overpay as much as you can/want. By overpaying, your term will reduce, without the enforced minimum payment level (think rainy days, car breaking down, birthdays, other emergencies)

Thanks for the reply Stevie. Im not sure if i was very clear, I want to work out which is a better result from making overpayments if there is any difference that is.

My understanding is that if I overpay say 200 per month I can choose whether i want my term to reduce or whether my minimum monthly payments to reduce with the term remaining constant. Would the amount of interest I pay be exactly the same?

It will be interesting to hear people's opinions on what they have chosen and why. Thanks everyone who has taken the time to read and post.

stevie_wonder

Mmm, what kind of mortgage have you got - more details pls?

rozzy_2

Together Mortgage with NR took out last Feb on a 5 yr fix 5.87% APR. 35 year term. The mortgage and loan was 100% value of the house.

stevie_wonder

Try this mortgage calculator and play about with the term and overpayments.
http://www.charcol.co.uk/knowledge-resources/calculators/flexible-mortgage/

It would be worth checking if your mortgage accepts overpayments, as most fixed mortgages limit how much, if anything, that you can overpay. I had an A&L fixed mortgage and they limited it to 10% of the total mortgage that you could overpay in a year, also you could only make one overpayment in January?

moominyak

rozzy wrote: »

Together Mortgage with NR took out last Feb on a 5 yr fix 5.87% APR. 35 year term.

And I thought I was the only person here with a 35 year term

Although it'll be 33 years from the 1st August (I'll be 69 btt it's paid off if I do nothing :eek: )

rozzy_2

Cheers for the advice Stevie, i have checked with NR and I can make unlimited overpayments until the debt is reduced to a pound without paying the early repayment charge. Thanks alot for pointing me to the calculator I will definately be checking that out.

rozzy_2

moominyak wrote: »

And I thought I was the only person here with a 35 year term

Although it'll be 33 years from the 1st August (I'll be 69 btt it's paid off if I do nothing :eek: )

Im sure you will have it paid off in no time.

My goal is to MF by 40, Some of the threads on here have been a great inspiration and give awesome tips. I already own a mortgage pig that I try to feed regulary although he's been going hungry the last week or so im afraid.