Reduce Term or Monthly Sum?

pkpk

Hi,
When depositing an early payment with Nationwide they offer two options. The payment will be used to reduce your monthly payments or taken off the term.

It seems strange as surely reducing your term would reduce the monthly payments anyway.

Does anyone know which of these would work out most economical and which would be the standard method that other mortgage companies use.

Thanks
Paul

shortchanged_2

No Paul, if you reduce the term you are paying the amount over a shorter time so the monthly amount increases, it's just paying it off quicker which will save you in the longer term as you will pay less interest.

Ultimately it depends on what you can afford at the moment. If you want to be mortgage free sooner keep your repayments the same and chip a bit off the repayment time,

OR

If you want to keep a bit more money for the here and now use it to reduce your monthly payments but keep the same time frame for paying off.



Ultimately the best way to save money on a mortgage is to pay it off quicker as you pay less interest over the term of the mortgage but it depends what you can actually afford at the moment.

pkpk

Thanks ShortChanged. Which is the most common way to do it and do you have any idea which would save most money in the long run or would it work out similar?

shortchanged_2

Sorry pkpk I edited my post while you were replying.

As I said the decision ultimately rides on what you can afford.

If you want to be mortgage free sooner, take it off the term (saying that it depends really how much comes off the term as to whether it is actually worth while)

On the other hand we are expecting tough times ahead so it may be a good time to make sure you are not too over commited on your mortgage.

As I said the choice is yours it depends on what is right for you at this moment in time.

pkpk

Hi Shortchanged. Thanks again for the advice. It seems most lenders have only one set option. Is this usually to take it off the term?

shortchanged_2

pkpk wrote: »

Hi Shortchanged. Thanks again for the advice. It seems most lenders have only one set option. Is this usually to take it off the term?

That I'm not really sure about. If Nationwide are offering you the choice then the decision is what really suits you.

What you are doing is paying off the capital so really reducing the term of the loan will do more with your money as if you keep the length of the loan the same you will end up losing more of that money to interest.

As I said before it really depends on your current position. I'm guessing as you can afford overpayments you're not particularly struggling for cash.

I'm sure most people if they could afford it would pay off their mortgage sooner, just consider the current climate.

getmore4less

For the same total payments going in it makes no difference to the total cost.

If you have limits on overpayments without penalty then reducing term maximises the amount you can put in.

With no limits on overpayments the reduced payment gives more flexability.

There is no common or best way it varies on individual circumstances.

Most lenders offer both options.

foxblade

I decided to pay off the capital on mine and not reduce the term, this is because a) It means when the monthly payments comes down I can overpay more by the difference and b) Because we are on tracker if the interest rates go up, I won't find my self stuck with a mortgage I can't afford. For example I can overpay now but one month I might need to pay a bill, well at the moment I can just not OP that month, but if I reduce the term I will have no choice but to pay.

tuggy

Take it off the term. keep the monthly repayments the same. Saves the most money

Jonbvn

foxblade wrote: »

I decided to pay off the capital on mine and not reduce the term.

I believe you decided to reduce the monthly payments.

greent

We have kept our term the same and also kept the payments at a higher level. Keeping the term the same (standard option for many lenders, esp for older mtges) means that with our lender we *could* then use any OPs that are in there to take a payment holiday/ reduce payments should we need to. As DH is self employed with irregular contracts this flexibility (as yet unused) could be a 'Good Thing' for us. We are on target to repay ours about 7 years early with OPs.

It is very much your choice