OP Help!!

Hi guys,

New here, have been reading all your diaries and feeling very inspired! Decided after receiving our first mortgage statement last month that we need to start overpaying (I think I was a little naive about the figures to begin with but seeing it on paper how much we pay each month and how much actually goes to repaying the capital was a wake-up call to say the least!).

Currently have a 35 year £135,000 mortgage with Santander fixed until August 2012 (at 6.75%, only had a 10% deposit initially). Intend to overpay by £500 a month as much as we can (I'm on maternity leave at the moment so things are tight but saving where we can), now I have a question, took the first cheque into branch today and the lady asked me if I wanted it to lower the monthly payments or the term, now I'm really confused as I thought that with every overpayment both would happen as the capital decreased (albeit by a small amount) can anyone explain this to me?! She said that if we were comfortable with our monthly payments decreasing the term would be better, I went with her but still don't really understand!

Many thanks in advance

Replies

  • dimbo61dimbo61 Forumite
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    you want to reduce the term and not the payments
  • pawlalapawlala Forumite
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    on the contrary, I would reduce the monthly payments and keep the term as it is.
  • originalmiscellanyoriginalmiscellany Forumite
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    If you say owe 24k and are paying back a fictional 1000 a month, when you overpay you have a choice:
    either:
    a) Lower monthly payments, e.g. (it's entirely theoretical these figures here) - you overpay by 1k on top of your mortgage, they divide the 1k up by the months remaining, and you pay less per month but the length of the mortgage stays the same.
    b) Shorter term - you overpay 1k, and they say instead of finishing it off in 20 something months time, why don't you just shorten the length of the mortgage.

    Ideally the shorter term option is the one to go for although not always possible, due to keeping up the financial commitments when as you said times are tough.

    Hope that helps?
    Feb 2012 - onwards MF achieved
    September 2016 - Back into clearing a mortgage - Was due to be paid off in 32 years in March 2047 -
    April 2018 down to 28.00 months vs 30.04 months at normal payment.
    Predicted mortgage clearing 03/2047 - now looking at 02/2045

    Aims: 1) To pay off mortgage within 20 years - 2037
  • welcome! not too dissimiliar so subscribing. good luck!
    MFW 148 - Mortgage £121,000 1Jan11 / Mortgage £120,300 28Jan11 / £119,808 24Feb11 / £119,400 22 April11 / £119,089 29 May11 / £118,500 October11
  • Thanks for the replies guys. The lady in the branch seemed to think reducing the term. I still don't understand how the capital decreasing wouldn't automatically recalculate monthly payments as you're paying interest on a smaller amount? I'm waffling now, up feeding the baby and should refrain from posting at this time!

    Night all....
  • SunnydaySunnyday Forumite
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    We reduced the monthly "official" payments but kept the direct debit at the same amount that we were paying originally.

    This brought the monthly payments down over time to a ridiculously small amount but as we were still paying the direct debit at the original rate we were automatically overpaying each month and this gave us more options.

    When DH became jobless for a while we changed the direct debit to the minimum payment and then upped it again when he got a new job, this gave us a safety net which was a godsend. We wouldnt have had this safety net if we had just reduced the term each time.

    Twice now we have reduced the term but it hasn`t really made a difference tbh, we shall be paying the mortgage off in a couple of months and we still have just under ten years left on our term.

    This will bring more options ie whether to leave the account with a nominal figure in - say £1 but i`think that we will close it and have it gone once and for all.`

    Good luck with whichever option you choose.

    SD
    Planning on starting the GC again soon :p
  • dimbo61dimbo61 Forumite
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    As others have said overpaying has a huge number of benefits
    1 you save 6.75% in interest tax free
    2 you are reducing your debts and also the mortgage term ( mortgage free before you retire)
    3 you are building up an overpayment pot which means you could have a " payment holiday"
    4 You could reduce your mortgage payment to the amount necassary to repay the mortgage over the NORMAL term ( I have overpaid so much that MY mortgage could now drop by £500 a month)
    5 Unlike money in savings account earning a poor rate of return which is then taxed the overpayments would not be taken into account if you lost your job!!!!!
  • blueberrypieblueberrypie Forumite
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    Thanks for the replies guys. The lady in the branch seemed to think reducing the term. I still don't understand how the capital decreasing wouldn't automatically recalculate monthly payments as you're paying interest on a smaller amount?

    Overpaying will reduce the capital. If you choose to keep the regular payments the same, that means you'll have paid off your mortgage sooner. If the regular payments are recalculated, your mortgage will still take 35 years to pay off, but you'll be paying less each month. Financially, both methods have the same result in the end.

    Which method is best for you depends on your circumstances. If your mortgage contract has a limit to how much you can overpay, and you think you might get close to that limit, it's probably better to reduce the term and avoid any charges for overpaying more than is allowed. If you think that at some point in the future (perhaps another maternity leave?) you might find it useful to be able to reduce how much you pay on your mortgage, it might be better to recalculate the monthly payments and just overpay the difference each month. If you think you'll be tempted to just spend the difference rather than keep shoving it towards the mortgage, probably best to keep the payments as they are and reduce the term.

    Other bits of info that might be useful:

    You can do a bit of both - let the lender recalculate the mortgage payments after the first few overpayments, thus reducing your monthly payment, but then start putting the overpayments towards reducing the term.

    Often lenders have general policies on this - e.g. anything over £500 might automatically trigger a recalculation of the monthly payment - but you can usually over-ride this by specifying what you want done.

    Some lenders will allow you to reduce the term and later increase it back to the original term. That's a good way to overpay without needing to actively make an overpayment every month, while still retaining the flexibility of reducing future payments if you need to. Check with your lender if you think that's something that might work for you.
  • Blueberrypie, I suddenly get it (it was a lightbulb moment reading your post!) I think at the moment while the monthly payments are affordable we should keep them the same. Thanks everyone for input, this place is so much more helpful than Santander themselves! Have a lovely day all...
  • getmore4lessgetmore4less Forumite
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    If your overpayments are at the limit of the penalty free ammount then you probably want to reduce the term so your total payment stays the same.

    If you reduce payment the total will go down over time, less of an issue if you can't hit the max every month.
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