Overpayment vs Higher Monthly Remortgage

benitoto

Hi all you Money Saving Experts,

I've been overpaying my mortgage now for a couple of months (ever since the student loan finally disappeared!) and can afford to pay approx £500 extra a month.

My current mortgage is a fixed 6.2% til 2012 (the full life of the mortgage is until 2040) at about £980 a month.

One calculator i came across said that by overpaying at the current rate i would pay off my mortgage by 2022 - a saving of 13 years and £125k, which is great!

But if i was to review my mortgage and just pay c. £1,500 per month on it i would apparently have the same finish date.

Soooo - i'm confused. i thought overpaying went straight on the capital and therefore meant less interest to pay and a much better deal all round. Am i missing something here?!

Am i better off overpaying, remortgaging to a shorter term or any of the above?

Confused... Thanks!

CLAPTON

Assuming that
-you are allowed to overpay
-there are no fees for overpayment
-and the interest charged is based on the monthly balance (and not a year figure)

then it's best to pay as much as possible as early as possible i.e. you will pay the loan off earliest and with least interest.

benitoto

Hi Clapton - I can overpay 10% of the outstanding capital without incurring any penalties. My intention was to move to a mortgage after 2012 that allowed for as much overpayment as i like as it is only after 2012 that my overpayment would be looking like exceeding the 10% max.

And yes - interest is calc'd monthly.

With all that in mind, are you saying the monthly overpayment (direct to capital) is the best option? This is what i have always assumed but these on-line calculators have thrown me off course!

Thanks,

Ben

Trying_to_be_good

You are overpaying the capital and reducing the term of the mortgage, keeping the monthly payment fixed (instead of keeping the term the same and reducing the 'normal' monthly payments).

So your overpayments have the same effect as if you made your 'normal' monthly payment the same as the sum of the current payment and overpayment, i.e. £980 + £500 = £1,480, roughly £1500 that you've used in the calculator.

By overpaying, rather than shortening the term and contractually increasing the 'normal' monthly payment, you retain the freedom to not overpay, or overpay by less. If you change your contract, you have to pay the higher amount and therefore have less flexibility.

Robert_Sterling_3

Stick with overpaying. :A

dimbo61

If you have a LIMIT of say £500 a month or 10% a year for overpayments you can for a small fee ( £50 ! ) usually change your mortgage term.
If you reduce the number of years you have the mortgage over this will increase the mortgage cost each month ( which you have to PAY )
You will then have the overpayments on top of the higher repayment to find each month but the mortgage will be cleared earlier with less interest.

benitoto

Gotchya! Well - it's not a limit set by the lender, just by my bank balance! Guess i will indeed just stick with the overpaying by choice. At least that way i can take a break as and when i feel the urge!:D