Overpayments versus term reduction

InMyDreams

K-Lye wrote:

Isn't it the case that when you overpay on your mortgage the money comes directly off the capital and hence reducing the overall interest charged.

Correct

K-Lye wrote:

In a sense, the savings you make in terms of interest are spread across the full term of your mortgage

Correct. But then equally, if you keep that overpayment in a savings account for the same length of time, the interest gained is compounded too. If the interest rates are the same (taking tax into account) they will balance each other out. Granted, this 12% regular saver only lasts a year, but after that year you are quids in. You then have to chose whether to use the money saved (including the interest) to overpay at that point or find another account at the same or greater interest as your mortgage. If you over pay using the interest you've gained too, you will bring your capital down further than had you simply paid the £250 (or whatever) off your mortgage during the year. See my example above. In my case, if I use the money to pay off capital at the end of the year and do nothing else, my caplital will be £75 less doing it this way. Plus all the interest that £75 would have accrued over the term.

K-Lye wrote:

a savings account which gives you interest only on the monies you invest? Or am I completely off base here? :question:

And then interest on the interest... compounding interest works both ways.

IMD

K-Lye

InMyDreams wrote:

And then interest on the interest... compounding interest works both ways.

Ah.. but of course!

Thinking about it then, this is simply a means to make better interest than a mortgage is offering you. So really, if one was savvy enough, you could just pay the interest on your mortgage and then move your excess money around savings accounts gaining as high an interest rate as possible, no?

Xbigman

In general you save more money by reducing the term than you do by reducing payments. The disadvantage is that you don't see any of that money saved until the mortgage ends.
By reducing payments the saving is small (per month) but is usually immediate the next month.

The above are rules of thumb. Personal circumstances and your exact mortgage deal play a big part.
Whether you are on daily interest calculation or not is the first question. If overpaying monthly, you should be. If you are not on daily interest then you should save up a lump sum and pay it off in one go at year end (usually December).
Regards



X

K-Lye

Xbigman wrote:

In general you save more money by reducing the term than you do by reducing payments. The disadvantage is that you don't see any of that money saved until the mortgage ends.
By reducing payments the saving is small (per month) but is usually immediate the next month.

Sorry, are you suggesting that a term reduction would be more beneficial than overpaying :question:

InMyDreams

K-Lye wrote:

Sorry, are you suggesting that a term reduction would be more beneficial than overpaying :question:

I think what Xbigman is refering to, is choosing between reducing your term and reducing your payments. If you are planning to increase your payments anyway, then the comparison isn't really applicable, and the official length of the term is immaterial. What he means is that what you 'save' each month due to your agreed repayment being less, will overall be less than what you 'save' by paying off the mortgage sooner. But you're planning to plough that 'saving' and more back into the mortgage anyway, so it doesn't apply to you unless you choose to stop overpaying.

For people just paying the agreed sum, then yes, Xbigman is right.

At the end of the day, the only thing that makes a difference is exactly how much you reduce the capital by each month. The more capital you pay off, the less interest you will pay overall. The whole concept of 'term of mortgage' is really only to calculate the monthly payment so that after that time your debt is paid off. If you're not sticking to that amount anyway, then just think of it as a guide to keep you on track and help you visualise how much longer you have to go.

roswell

One thing to remember is that at a point your savings may be "To much" if your Oh looses his job or similar, if you paided the money into your mortgage you would have no or little savings and your OH could get benifits, if you have large savings he may not get benifits