reduce payment or reduce term

jl45

If I overpay by £500 I can choose to either reduce future monthly payments or the term of the mortgage. Which one should I do? Does it even make a difference?

I'm on 5.49% 25yr fixed, 22 yrs remaining, monthly payment is around £400.

laurasavon

If you reduce the term you will pay the mortgage off quicker by using your over payments, if you reduce the monthly payment then you'll still pay the mortgage off over the original term just a few pounds less each month.

If you want to clear the mortgage as quickly as you can then reduce the term.

jl45

Which method results in paying less interest over the course of the debt?

http://www.guardian.co.uk/money/2008/sep/10/mortgages.property1 suggest I should choose to shorten the term rather than reduce the monthly payment

laurasavon

Reducing the term will mean paying less interest yes

Jonbvn

OP,

If you reduce the term, then you are obliged to keep making the higher payments. What happens if you have problems, e,g. lose your job? Given this, I would reduce the payments, and continue to make higher payments (assuming your T&C's allow it).

RosieTiger

You need to check how much you will be allowed to over pay. If for example they only allow you to overpay by 10%, ten reducing the payment will limit your ability to over pay over time. Reducing the term means you pay it quicker, but, as has been pointed out already, you will be left needing to pay at ahigher rate going forward. If your comfortable with that, then reduce the term.

jl45

RosieTiger wrote: »

You need to check how much you will be allowed to over pay. If for example they only allow you to overpay by 10%, ten reducing the payment will limit your ability to over pay over time. Reducing the term means you pay it quicker, but, as has been pointed out already, you will be left needing to pay at ahigher rate going forward. If your comfortable with that, then reduce the term.

I can pay £500 per calender month without incurring an ERC. I am happy with the monthly payment level that it is and dont have any need to reduce it.

I do however have a lot of spare money lying around and rather than invest in saving scheme would prefer to reduce my mortgage, im with Nationwide by the way. Just really wasnt sure if I should go down the path of reducing the term or the monthly payment.

If you reduce the term, then you are obliged to keep making the higher payments. What happens if you have problems, e,g. lose your job? Given this, I would reduce the payments, and continue to make higher payments (assuming your T&C's allow it).

From their FAQ

• Can I use my overpayment(s) to underpay in the future?. Click to hide / reveal content under this heading (keyboard users hit Return key)
  Yes. When you overpay this builds up an overpayment ‘reserve’, which you can use to either reduce your monthly payments by a set amount (e.g. £50.00 per month), or stop making payments for a set period. You can use either part or all of your overpayment reserve to do this, but the maximum amount you can underpay by is the value of the overpayment reserve you have built up.
  
  When you underpay, your monthly payment will be recalculated at the next rate change (variable rates only) or at the end of your product term, depending on which is first.
  

dimbo61

Sounds like a good plan as you wont be earning 5.49% after tax from savings so if you can overpay by £500 each month and ask for the term to be reduced.
You dont have a 25year fix rate at 5.49% do you ?
You dont give the size of the mortgage but overpaying by £500 a month , £6,000 a year will soon clear the mortgage!

jl45

dimbo61 wrote: »

You dont have a 25year fix rate at 5.49% do you ?
You dont give the size of the mortgage but overpaying by £500 a month , £6,000 a year will soon clear the mortgage!

Yes I do its fixed for 25 years there is around 60k on the balance at the moment.

haras_nosirrah

How long do the ERC's last - if it is a 25 year fix mortgage you may have to pay a penalty if you clear it within 25 years. Check when the ERC is no longer applicable

RosieTiger

Then I would definitely go for the reduction in the loan term and not the monthly payment.