Mortgage overpayments

ee1

Just wanted a bit of advice on making overpayments.

We try to overpay each month and our lender allows us to decide whether we want the payment to either reduce the term of our mortgage or come off the capital (which means our monthly payments reduce).

Is one of these options better than the other in terms of reducing the overall amount of interest we pay?

Any suggestions?

smartsaver

This is a laymans reply.

If you can afford it it is always better to pay money off your mortgage. That way you will ulitmately pay less interest and be mortgage free earlier

titewad_2

You will ultimately pay less interest,the shorter the term you pay it over so if you can afford the amounts you are overpaying, then elect to shorten the term rather than lessen the monthly repayments.

Joe_Bloggs

Overpayments must come of the capital ! The choice the lender should gives to the borrower is:
1) Reduce the amount of the monthly repayment keeping the term of mortgage fixed.
2) Reduce the term of the mortgage.

If you can overpay without penalty you can manipulate the monthly repayment or the term. It all depends upon your personal finances. The overpayment terms and conditions of the lenders should be consulted and understood by all parties. You could also divert the money intended for overpayments to investments if you could make greater tax free returns.

J_B. (Your next mortgage may be the most important financial undertaking in your life ! )

ocemeer

arghhhhh now really confused..
have a mortgage that i can overpay every month on and it reduces the term
or.... lump sum up to the amount of 10% of total capital to bring the capital down.
In my ignorance am paying lump sums atm as think bringing the capital down the right thing, now confused which is right.

My DH is overpaying every month on his though not sure which it effects so will have to check he can lump sum but only in JANUARY good call by the company!
are we both doing the right thing?

Rebob

Any extra payment are usually best aimed at reducing the length of the mortgage.

With my abbey mortgage if I make an overpayment under £500 it does not affect the capital outstanding until the end of the year so I pay in £500 increments upto the 10% allowed. I have also requested to shorten the term as this lowers the amount of interest due.

HTH

Joe_Bloggs

Mortgage lenders often have restrictions on:-
1) How much you can pay back.
2) When you can pay it back.
3) When they will acknowledge the overpayment and reduce the capital on which they are charging interest.

It is all down to the terms and conditions. I had to sign a statement before a witness that said that I understood the terms and conditions. My local branch of my lender did not have a copy of the T&C and they are empowered to sell mortgages ! How much, when, and the net benefit or penalties are down to the T&Cs of the specific mortgage product.
J_B.

tomstickland

I've been doing some obsessive thinking about this because I aim to overpay my mortgage every month once it starts (I'm right at the start of my mortgage-free-wanabee process). I'll do some basic maths to see what effect is all has. So far I've realised that if I overpay by £300 per month I can pay my £76K mortgage off in 11 years, compared to the 25 year standard.

ocemeer

think it all makes sense now....
new plan of action...
keep dh doing as he is (and try and put in a lump sum in january)
Once major building work done on my beloved cottage start over paying each month (and put in a lump sum every year)
that way i hope to get the best of both worlds..
now just got to send dh to the nearest street corner to earn a living....

Joe_Bloggs

That is a great idea for an outdated mortgage vehical. You could be taxed on the interest you accumulate as you build up your overpayment. Can you leagally beat the taxation of interest issue with more planning ?
J_B.