Any disadvantage in increasing mortgage term if overpaying anyway?

bacardi.

Hi

I have just done this on a mortgage calc for you

£100,000 @ 5% over 22 years= £625.28pm total payment £165,074.12

£100,000 @ 5% over 25 years= £584.59pm total payment £175,377.01

Difference in payment £40.69

£100,000 @ 5% over 25 years= £584.59pm + £40.49 overpayment total payment £165,074.27 repaid in 22years

so extending your term does give you a backup if things got tight, and if you pay your original amount you will still have repaid in 22 years. Things to check that you are allowed to overpay without penalty, and that there is not a admin charge for making the overpayment. If you pay more than your original payment you will clear your mortage even quicker,but the above shows that you would be no worse off.

Lister_2

blueberrypie wrote: »

A shorter term will mean an increase in the amount you are *required* to pay each month, but will allow you to overpay by more without incurring a penalty.

Soz, I'm not with you here. Why would a shorter term mean I'm allowed to overpay more? I thought it tended to be 10% of capital per year?

uzubairu

blueberrypie wrote: »

Take into account that there will likely be a penalty if you over-pay by more than a certain amount each year.

For example, if you borrow £100k and you are allowed to overpay by up to 10% of your balance each year, you can overpay by up to £10k in the first year - but if you pay more than that, you'll be charged a percentage of the overpayment as a penalty.

A shorter term will mean an increase in the amount you are *required* to pay each month, but will allow you to overpay by more without incurring a penalty.

I'm on a 10 year fix with Nationwide (25yr in total) and we can only overpay a maximum of £500 per month without penalty.
Our monthly payments were £646 and we were also overpaying the maximum of £500 per month by standing order.

We wanted to pay more each month, as our household budget was flexible enough to allow this, so we called the Nationwide and they reduced the remaining term of our mortgage by several years so our monthly mortgage payment is now £765.
We can still overpay £500.

After 2.5 years, the term remaining on our mortgage is now 14 years and 10 months (instead of 22.5 years).
This is a reduction of over 7.5 years, and this figure will increase if we continue to overpay.
Our master plan is to have it all paid off by the time the fixed period ends in 2016 and thereby saving us lots of interest and 15 years of mortgage payments.

Next year we will be reducing the term again so that we can increase the mortgage payment to £900.

blueberrypie

Lister wrote: »

Soz, I'm not with you here. Why would a shorter term mean I'm allowed to overpay more? I thought it tended to be 10% of capital per year?

Using the figures you posted earlier, for illustration:

Because your £1200 payment each month has two bits to it:
- the bit you must pay (the £866 or £830)
- the overpayment (£334 or £370 - that's your £1200 minus your standard payment amount)

Let's say your mortgage agreement doesn't allow for overpayments at all (I know it does, but just go with it for a minute). If the penalty is 5% of the overpayment, you'll be charged £16.70 for paying £334 extra each month - or £18.50 for paying £370 extra per month.

Most (all? I don't know) mortgages do allow some overpayment, so some of that extra is okay - but if you think you might overpay enough that you get into the "penalty area", it might be worth going for a shorter term and a higher "standard" payment in order to avoid or reduce it.

It depends on lots of things: your mortgage agreement, how much you owe, how much you overpay, what the penalties are, etc - and any penalty could be minimal. But then the difference between £830 and £866 isn't great either - if you can afford £830, you can probably swing £866.

Lister_2

blueberrypie wrote: »

it might be worth going for a shorter term and a higher "standard" payment

I gotcha. Thanks. :beer:

VfM4meplse

_Andy_ wrote: »

I don't think you have an understanding of how banks fund mortgages.
In any case, are you suggesting that it's "taking the p.." for a bank to dare to make profit?

My first mortgage was fixed for 2 years at this rate and the base rate was not nearly as low. The base rate has dropped to encourage the banks to lend, they are not passing the financial advantage to customers as the govt has intended, hence we're not getting the mobility in the market we need...so yes, depite everything banks are still profiteering. When the financial industry is not fixing the problem it created despite being given the tools to do so of course they are taking the p. This recession started with the credit crunch and inappropriate lending after all.

Rolandtheroadie

Banks need to protect savers as well. (I should mention I'm mortgaged, very little savings as such but a realist with regards to interest payments).
The recession and credit crunch were caused by inappropriate lending and profiteering, theres no doubt about that.
A lot of people that cannot get credit/mortgages now are those that the banks shouldnt have been lending to in the first place. This also means people who wouldnt default/could pay back their debt cant get credit as the banks are now ultra cautious.

This caution includes looking at mortgage terms. You have owned your house for X amount of years yet you still need a 25 year mortgage? Could be problems here (a bank may think, not me).
The interest is the same whether you are paying it for 5 years or 50 years (the monthly interest only part of the mortgage. I know you know this already, it's to stop some idiot questioning it and getting upset).
Your required monthly payment back to your mortgage lump sum would be lower, meaning more of your overpayment would come off your lump sum.
To me the benefit would be getting your LTV down quicker, so possibly a good idea.

feisty1

scotsman4th wrote: »

Banks need to protect savers as well. (I should mention I'm mortgaged, very little savings as such but a realist with regards to interest payments).
The recession and credit crunch were caused by inappropriate lending and profiteering, theres no doubt about that.
A lot of people that cannot get credit/mortgages now are those that the banks shouldnt have been lending to in the first place. This also means people who wouldnt default/could pay back their debt cant get credit as the banks are now ultra cautious.

This caution includes looking at mortgage terms. You have owned your house for X amount of years yet you still need a 25 year mortgage? Could be problems here (a bank may think, not me).
The interest is the same whether you are paying it for 5 years or 50 years (the monthly interest only part of the mortgage. I know you know this already, it's to stop some idiot questioning it and getting upset).
Your required monthly payment back to your mortgage lump sum would be lower, meaning more of your overpayment would come off your lump sum.
To me the benefit would be getting your LTV down quicker, so possibly a good idea.

scotsman4th..extending a mortgage term is common practice as is decreasing, gone are the days when mortgages went down 25, 24, 23 etc....
people's circumstances change more now therefore mortgages are much more
flexible to fit in & around lifestyles ...........Interest is interest, but if you have yr interest spread over a term of 50yrs u will pay a lot more than if u had it over a term of 5yrs

Rolandtheroadie

You will pay the interest for longer yes (and hence pay more), but it is still the same monthly amount.

I could go to the bank tomorrow and take out a 5 year interest only mortgage. My monthly payments will still be the same if I take it interest only over 25 years. (no capital repayment)

Sorry if i'm not seeing something, but this is what I was meaning.

feisty1

ye ye interest the same but the total amount payable depends on the term u took it over..a guid new year