Reduce Term or Monthly Sum? General Advice Please

whiskywhisky

Hi All

Briefly my situation for wanting to be mortgage free is as follows:

- Currently have 80k mortgage, fixed on 5.39% repayment until May 2012.
- I have made £5k overpayment this year, and will may another £3k in a couple of weeks (10% is annual limit).
- I have just started saving like mad, wanting to be either mortgage free or as near to in May 2012 - this by saving and hoping I get near to the amount needed.

My rough calculations, I will pay £3k this year bring the mortgage to around £77k (minus repayments etc), next year I will pay roughly 10% = £7700 and bring to around £69k and then at the start of 2012 I will pay around £6900 and with repayments I am guessing I will end up with a final balance of approximately £56k. Can anyone please advise if my calculations are close? or have I totally got this wrong?

On top of our expenditure (mortgage, food etc) I am close to saving around £20k annually, therefore I am trying to plan ahead in the desperate hope to be mortgage free.

Regarding the overpayment, can someone please advise should I Reduce Term or Monthly Sum? when making lump sum.

Many Thanks (will be lost without you lot)

whiskywhisky

Bump - any advice on whether these calculations are correct + whether I should Reduce Term or Monthly Sum? please

lil_lisa

I am by no means an expert on this and wouldn't want to advise on the sums but I would say that this would have to be an entirely personal decision depending on your aims (very helpful I know!)

You say that you want to be mortgage free but if you reduce the monthly payments then you wont actually be mortgage free any sooner but you will have more cash to play with in that term. If you opted to keep the payments the same then you would be shaving years off the mortgage.

Sorry if i'm stating the obvious here!

Another thing to bear in mind is what could happen to your interest rate after the fixed term ends. If it shoots up after that time and you've chosen to reduce the figure and maintain the term then you could have a longer period when you're being charged the higher rate, therefore accumulating more in compound interest. Although that can only really be speculative!

whiskywhisky

lil_lisa - thanks.

Your right it is all a bit speculative! plus I dont think I got the point across in my post. The plan really is to (I am probably dreaming but may have a small chance) pay off the mortgage once the fix term ended in May 2012.

With this in mind I wanted to know if my calculations seemed ok + whether I should Reduce Term or Monthly Sum?

I am sorry if this is a simple question, as I just want to make a plan how to play this game for wanting to be mortagge free and start budgeting for an amount to hopefully pay off in May 2012.

After I have done this "plan"- I will definitely think of plan B should I not be able to pay off the mortgage.

Thanks

Baby_steps_2

whiskywhisky wrote: »

Hi All

Briefly my situation for wanting to be mortgage free is as follows:

- Currently have 80k mortgage, fixed on 5.39% repayment until May 2012.
- I have made £5k overpayment this year, and will may another £3k in a couple of weeks (10% is annual limit).Is this 10% of the starting balnce or 10% of the repayment amount. May be worth a check though from your sums i'm assumming the starting balance.
- I have just started saving like mad, wanting to be either mortgage free or as near to in May 2012 - this by saving and hoping I get near to the amount needed.

My rough calculations, I will pay £3k this year bring the mortgage to around £77k (minus repayments etc), next year I will pay roughly 10% = £7700 and bring to around £69k and then at the start of 2012 I will pay around £6900 and with repayments I am guessing I will end up with a final balance of approximately £56k. Can anyone please advise if my calculations are close? or have I totally got this wrong? Yes you have calculated 10% of what you are saying will be your starting balance, though i can't confirm you got the starting balance right. Have you used a mortgage overpayment spreadsheet to confirm these are the expected starting figures?

On top of our expenditure (mortgage, food etc) I am close to saving around £20k annually, therefore I am trying to plan ahead in the desperate hope to be mortgage free.

Regarding the overpayment, can someone please advise should I Reduce Term or Monthly Sum? when making lump sum.

Many Thanks (will be lost without you lot)

If you reduce the term of your mortgage then your monthly payments will stay the same, but your balance will reduce more therefore reducing the 10% amount you can over pay.

If you reduce the monthly amount your term will stay the same and you will have more money to save.

You mention you save approx £20K year, do you save this over a yer or is it a bonus of some kind?

Depeding on the interest you get on this (which at the moment on savings is probably less than your mortgage rate), it may be worth speaking to the mortgage company (and if they don't charge or the charge is reasonable), reducing the term of your mortgage dramatically (you don't mention how long it is, but for example from 20 to 5 years). This will increse the monthly repayments and mean you will not have such a big lump sum at the end to repay.

This could be an option if you have the savngs monthly to pay off the mortgage instead However beware if you reduce the term the mortgage company are not likely to class this as overpayments and getting the money back in an emergency is unlikely to be possible. Although they may to let you re-extend the term again should you need to.

Good luck with it all.

whiskywhisky

The couple of times I have overpaid, I now realise I made a mistake as I asked to have the amount I pay every month reduced. I guess I should have contiuned to pay the same and therefore reduced the term (damn!).

With the saving of £20k - no that is not a bonus just the sort of the lifestyle we have been living for the last couple of year and intend to over the next couple of years = saving every bit we can.

The mortgage has about 21 years to go. I was not aware that lenders can/may reduce the term, obviously the payment will increase which I am able to afford. Is this common practice? should I ring the lender? this meaning shall I go with this if they are willing to reduce?

Thanks

getmore4less

Max out your ISAs and take a bit longer to pay off the mortgage.

Once the mortgage is paid off you are going to need to find a home for the money and it is not easy to find tax friendly shelters.

with £20k saving £7k overpayments and £6k normal mortgage payments thats £33k a year that needs investing somewhere.

Best to start thinking seriously about that now.

whiskywhisky

getmore4less = thanks interesting point about what to do with the extra money that "hopefully" will be availble in 2/3 years. Never given it a thought, but in the long term we will hope to move to a bigger house, plus buy a second car and maybe a holiday or 2. I do have a major ambitiion to be mortgage free, therefore I really just want to concentrate on somehow paying the mortgage off.

With the ISAs - myself and my wife only have a cash isa which we opened this year, it has around £5k each in.

I have searched around without much success, is anyone aware of a mortgage calculator where you can input "lump sum" payments into?

Many Thanks

Sleepy_head_2

Hi Whiskywhisky

Some lenders charge to alter the term and other's don't, some will also let you reduce the term for free and if things become hard, change it back again so it's definitely worth a phone call to discuss. It's also worth checking your 10% allowance is per 12 calendar months as this will depend on the lender. Halifax have a 12 month rolling period which means as soon as you make an overpayment the 12 months starts again...which can get very complicated!

HTH

whiskywhisky

Sleepy head - thanks as I have made a few lumpsum payments over the last couple of years I know that my overpayment "calendar" is jan to dec.

Regarding the issue with the possibility of reducing the term of the mortgage. Been thinking about this, I may sound really dumb here. But will I really benefit by reducing the term? This meaning by reducing will I not end up paying a lot more interest with each repayment and therefore will I not be better off just making a lump sum payment (hopefully the full amount) when the fixed period finishes in May 2012?? which will take the money straight off the owning amount without interest.

Sorry if this sounds odd, just that I cannot find a mortgage calculator where I can put lump sum payments etc into.

Thanks

pawlala

I chose to make all my overpayments reduce the monthly sum rather than reducing the term. All the subsequent savings made each month after that went back on reducing the sum even further. Kept doing this until I only had about £50 to pay off over 18 years. About 20p a month!