Reduce the mortgage term?

Financial_Savvy

Hi,

Has anybody here reduced the mortgage term i.e. from 25 years to 20 years to increase the payments to become Mortgage free earlier?

I have a 2 year fixed rate deal, and I spoke to the provider today and apparently you can do this, with no fee.

Did you know that you can do this? I thought a fixed rate deal meant the payments where fixed for the period of the mortgage.

Thanks
James

marksward

Are they changing the mortgage 'contract' or just allowing you to make overpayments? many lenders let you make overpayments, which in turn reduce the term of your mortgage

Harloshred

I made large overpayments on my mortgage; the BS wrote saying they had reduced my mortgage term (without asking).
However, I preferred just to make the overpayments without being "fixed" to a shorter term which I was more comfortable with as I felt it gave me more flexibility for the future if I was ever unable to make the normal monthly payments.

Financial_Savvy

I often (most months) make overpayments, and I can do this up to £500 per month no penalty and the interest is calculated daily.

When I spoke to them today apparently you can reduce the term with no penalty. When I get the form etc I will post to let you guys know.

Joe_Bloggs

When a mortgage lender allows overpayments on a repayment mortgage two interelated aspects of the mortgage are likely to be changed. Either the term or the monthly repayment will be affected.
There are now two terms/time periods involved. One of the terms is unaffected, lets call this the nominal term of the mortgage. This is a maximum time that sets the minimum monthly payments to pay of the mortgage at the current interest rate. The actual nominal term ticks down every month you stay with the same mortgage. The monthly repayment is normally re-calculated on an interest rate change or some other reason based upon the nominal term.

The other term could be called the virtual term. This is the amount of time that the mortgage will be paid off given past, current and projected future overpayments. These payments are all capital and reduce future interest. This virtual term is based upon a mortgage calculator that can accept overpayments. There are often limits to overpayments and penalties if they are exceeded.

You often have to instruct the lender what to do with the mortgage when overpayments are received. They could just reduce the monthly repayment each month to keep the virtual term equal to the nominal term. They could just do nothing and let the virtual term decrease.

What does build up with overpayments is a reserve facility. This may have diffferent treatments according to lender. I have no idea of the spread of treatments throughout the lenders. I know I can borrow mine back with a letter requesting the amount required.

The term 'term' is an overloaded word. Perhaps a different terminology should be used. Nominal is just another word for something in name only. Virtual is along the right lines in my view. Any suggestions or thoughts. Am I talking rubbish ? Should we have a sticky at the top of the page ?

J_B.

Miss_Penny_Pincher_2

You aren't talking rubbish J_B and apologies for going back to the financial nitty gritty...

Financial_Savvy I was just wondering is your mortgage with Nationwide? I'm currently on a 2 year fix with them and overpaying £500 every month but I have money spare that I'm saving ready to pay towards the mortgage as soon as the fix ends.

The £500 overpayment is currently being used to reduce the length of the mortgage. This would mean (assuming the extremely unlikely event of my interest payments not changing for the length of the mortgage) I would save just over £40,000 in interest and conclude the mortgage in 9 years and 6 months.

BUT if I followed your example and asked to reduce the actual length of the mortgage from 25 years to 15 years my monthly repayments would increase by £200 and I would still make the maximum overpayments of £500 a month = around £44,500 interest would be saved and the mortgaged would be completed in 7 years and 8 months. All sounds good!

Do you think Nationwide would agree to this? It sounds worthwhile but would it be?

Joe_Bloggs

@Miss Penny Pincher
I am on your wavelength and also with Nationwide. My monthly mortgage repayment went down £10 with the interest rate increase because of past overpayments (five year tracker) . If the existing term is too long and you can't get rid of your spare cash then give them a call. The £500 limit has been constant for too long. This limit is per mortgage. It is not uncommon for Nationwide lenders to have two or more mortgages.
There may be tax free interest/risk free savings options that pay more than your Nationwide mortgage.
J_B.
Spot the edit. Check your ISA options.

Miss_Penny_Pincher_2

Thanks J_B - I have max £3000 in NS&I mini-cash ISA (used all previous ISA savings up to pay the deposit on house) which at 5.30% tax free is ideal. I am drip feeding £1,000 a month from my emergency back up fund into high interest regular savers but a bit of money is just sitting around in lower interest instant access savings accounts. I think in a few months most will be in regular savers anyway so it's probably not worth my while arranging with Nationwide to shorten the length of the mortgage?

Joe_Bloggs

I am saving up for that particular NS&I ISA product. It has a steep entry point of £1000 and no transfers in. Sod the bu**ers who don't have the cash should be the scripted words, of a certain sweet business guru, given the circumstances.
J_B.

Financial_Savvy

Did you guys get your mortgages sorted?