Overpaying to reduce term

waterman3

I've just been to see a mortgage advisor at BoS

I was originally going to overpay to reduce the capital but she said i could save much more by reducing the term. I'm not sure if this is true or flannel?

Say if i overpay to reduce the term to 20 years, and in a couple of months i decide to get a new mortgage deal with another lender, will the new lender be aware that i've reduced my term and will the new lender also treat it as a mortgage with 20 years remaining?

Hope this makes sense

getmore4less

if you reduce the term with overpayments they keep the regular payment the same.

If you keep the term you reduce the regular payments, sometimes immedately sometimes at the end of the mortgage year.


Makes no difference to a new lender you just tell them what you want £x over n years and they tell what to pay.

waterman3

forgive my ignorance but If it makes no difference to a new lender, i don't see how it benefits me to reduce the term.

If you overpay to reduce the capital amount to say £50,000, then you can say to a new lender " i only need to borrow £50,000". But if you're reducing the term, and then get a new mortgage deal with a new lender with possibly a different term, how has reducing the term benefited me?

VIGILANT22

the shorter the term the less interest you pay

Boozer

waterman3 wrote: »

how has reducing the term benefited me?

You have paid more every month for the time you have had the mortgage, hence more of the capital has been paid off.

Spend some time on a mortgage calculator and you will see how each works out over the long term.

waterman3

but if i change my mortgage deal and go with a new lender in a month, they won't care what my mortgage term was with my previous lender.

I'm really sorry, i can't get my head round this

dimbo61

The more you overpay now the less debt you have when you come to move property and the less you need to borrow!
Now with the current lending situation if you have a big deposit and only borrowing 2/3 X income then the better the chance of getting the mortgage you want at the best interest rate!

waterman3

but i'm talking about overpaying to reduce the term not the capital amount

CLAPTON

when you take a mortgage out the lender will tell you how much you need to pay each month to pay the mortgage back in say 25 years
lets say you borrow 100k over 25 years paying say 600 per month

each monthly payment you make, pays that's months interest off plus a little bit of the capital

if you want to repay the mortgage more quickly then there are two ways of doing it
1. going to your mortgage company and telling them you want to clear the mortgage in 20 years.. they will recalculate the mortgage and charge you say 680 per month (the extra 80 will reduce your capital outstanding faster than the 600 payment as the 80 comes straight off the capital)

or
2. you can simply make an overpayment of 80 per month.
in this case if you continue to overpay 80 the mortgage will end in 20 years exactly as in the first case. because the 80 comes straight of the capital:
the only difference is that the mortgage company hasn't formally changed your monthly paymenet ,,, that's still 600 but of course you are continuing to pay 80 extra.

ok so what happens when you change mortgage providers?

because you have been more each month then the capital remaining will be less than had you remained only paying 600 per month... but its doesn't matter whether you had formally changed your mortgage term or simply overpaid.. in both situations the capital will be less.

So why bother; well there is no particular benefit in formally changing the term of a mortgage as long as they allow you to overpay without charging any fees. In fact it's a bit more flexible if for any reason you want to vary the payment

waterman3

as far as i'm aware , if you make an overpayment to reduce the term, then the capital sum outstanding remains the same.

Boozer

waterman3 wrote: »

as far as i'm aware , if you make an overpayment to reduce the term, then the capital sum outstanding remains the same.

You are only reducing the term due to paying off the capital, hence the loan finishes earlier and you stop paying interest sooner, which for 100K at 5% is 416 GBP a month.

so if you over pay 80 GBP a month, the capital will reduce by 960 a year, hence paying off an extra 19620 in the first 20 years and then you save the next 5 years interest on that sum.

I think:), thats how i see it anyway.