Is it better to shorten term or payment rate by overpayment??

nat_2

Dear all,
We have around £155000 mortgage (21 years left) with Nationwide, currently on their BMR 2.5% rate. We intend to overpay £10000 this month, but are not sure whether is better to ask Nationwide to shorten our term or to lower the monthly payment rate. We can afford to pay the current monthly rate and will keep overpaying, as much as we can in future.
Any calculator would also be welcome. I was not able to find suitable one, although I looked on many previously posted links.
Thank you.

pawlala

I made a large OP 6 weeks ago and opted to reduce the monthly payment. The term is still 19 years but now the payments are a massive £300 less per month. Instead of going on interest payments its straight into my back pocket ready for another OP soon. I'll have saved nearly £1000 in interest by the end of the year!

Joe_Bloggs

12 x 21years = 252 months
155000 @2.5% for 252 months is £791.23 per month
145000 @2.5% for 252 months is £740.18 per month
Thus the payments are reduced by £51.05 each month by making a £10000 overpayment.

Making the overpayment and maintaining the £791.23 repayment schedule will reduce the term to 231 months that is 19 years 3 months. A saving of 21 months.

J_B.

nat_2

Thank you both for useful and quick responses

It seems that the savings would be:

overpayment of £10000 lowers our monthly rate for £51.05
£51.05 for 252 months = £12864.6
saving us £2864.6

the same overpayment can shorten our mortgage term for 21 month
£791.23 for 21 month = £16615.83
saving us £6615.83

cheers!

CLAPTON

I'm not quite sure what the question is but all things being equal the earlier you make over payments then the sooner the mortgage is paid off and with the least interest.

so as long as you can afford it, you want to make the highest overpayments and continue with the highest monthly amount.

lhostis

Hi,
I have just written a web mortgage calculator that can take into account lump sum payment at any point in time and reduce the mortgage term accordingly: You can check out my home page in the Finance Section

ccgi.lhostis.plus.com/blogs.php?categoryid=3


It should be able to handle you problem.

DLH

cake21

http://ccgi.lhostis.plus.com/blogs.php?categoryid=3

Thanks for that, just had a quick play around

lhostis wrote: »

Hi,
I have just written a web mortgage calculator that can take into account lump sum payment at any point in time and reduce the mortgage term accordingly: You can check out my home page in the Finance Section

ccgi.lhostis.plus.com/blogs.php?categoryid=3


It should be able to handle you problem.

DLH

chirpchirp

In relation to whether it is best to shorten the term, this is a good thing to do if you can only overpay by a specific percentage. Many mortgages will only allow a 10% overpayment without you incurring a penalty. Thus by shortening the term, you are making your monthly payment more and your overpayment less but still paying off the same amount of capital.

However, if you are on a mortgage which allows unlimited overpayments there is no need to shorten your term and no benefit in doing so as far as I can see. By making overpayments the end of your mortgage will occur when you pay it off. So your term may still say 8 years and 8 months but your balance will be nil so hence your mortgage will still be paid off.

The danger with shortening your term is that you are committing yourself to paying the higher amount and if your circumstances change and for some reason you don't have your normal income then you may find yourself in difficulties and my not be able to lengthen your term.

nat_2

Thank you all.
At present we are allowed to overpay any amount of money on our mortgage, therefore we did and kept future monthly payments the same, thus reducing a mortgage term for 21 month. We intend to continue with smaller overpayments monthly. At present we are on BMR with Nationwide, which is 2.5% . That is better rate than any we could find when looking into re-mortgaging at the end of our tracker deal. We will see how things go with BoE interest rates and may have to get different mortgage deal in future.
nat