Reduce term immediately or just over pay?

ally18

Quick question please.

Is there a benefit to asking the bank to reduce the term straight away?

If you overpay by £50 per month and have the term reduced to bring the monthly payment up, how does it work on the interest side?

Or is it best to keep the term with lower payments and just over pay each month?

I suppose it depends on circumstances but is there an additional saving to be gained?

Don't know the ins and outs of how interest is charged.
Thanks

Sunnyday

ally18 wrote: »

Quick question please.

Is there a benefit to asking the bank to reduce the term straight away?

If you overpay by £50 per month and have the term reduced to bring the monthly payment up, how does it work on the interest side?

Or is it best to keep the term with lower payments and just over pay each month?

I suppose it depends on circumstances but is there an additional saving to be gained?

Don't know the ins and outs of how interest is charged.
Thanks

I`m not sure how it works on the interest side but it was once explained to me that if the term is reduced then the payments stay at the new level all the time.

If you ever need to reduce the payment for any reason then you may not be able to do it.

For this reason i have always let the official minimum payment come down and overpaid as much as i could on top of that.

HTH

SD

Giraff

I agree with sd things crop up and you might need the money.

ally18

I agree, thanks anyway.

I just wasn't sure if there were any more hidden benefits of doing that.

whatyadoinsucka

depending on your bank the interest should in theory always be %interest x Capital to be Repaid

Assuming interest is calculated on a daily basis (like hsbc and all other good banks)
Thus if you were repaying over 5 years or a hundred years the interest would be the same, only the capital element would adjust to ensure your capital is repayed over the set time..

thus if you overpay on a mortgage that calculates daily, you should see the future interest reduce overtime..
if you use the mortgage calculator graphs you will see, in the early years of a capital repayment mortgage interest is a far higher majority of funds in the early years where as capital payment is higher in the final years..

for example (very basic) if you were repaying £500 a month on a £100k mortgage at interest of 5%
in the first year you'd pay £6,000 with interest being £5,000, thus mortgage at end of year 1 is £99k
now in the 'xxxx' years of your mortgage same interest rates
assume mortgage is down to £10,000
'xxxx' years Repayment still £6,000 of which interest would only be £500, thus you'd repay £5,500
at the end of this year mortgage would finish the year at £4,500

conclusion overpay as much as you can afford, remember if you reduce your Term (years) when base rates rise so will the interest element, on top of the higher capital repayment
I can't believe this isn't on the school gcse curriculum so easy and yet so misunderstood

cha97michelle

I've done a mix of the 2 over my time. At first my goal was to make payments low enough to afford when being a SAHM. Now i am reducing my term to get it cleared quicker. The main benefit for me in my way is i can afford my payments no problem on just DHs wages, and then overpay what we can or none at all.

Plus, now, i am working to get my mortgage under 10 years as with my mortgage if you try and clear it with more than 10 years to go this is an early repayment charge.

Do what is best for your circumstances but make sure you know what you are able to do.

I know i can flip back and forth between the 2 methods with no cost to me in doing so.