Mortgage overpayment options

mercmanricky

Hello all, I need a little advice on exact benefits of overpayments.

I have read the guides on this site and read information from nationwide (my lender) and have decided that we are going to overpay £500 a month.

I've been offered the following two options by nationwide.

A. Decrease my monthly payments immediately after every overpayment.
B. Decrease my mortgage term.

I presume that B is the better option overall? Surely it means that overall we'll pay a lot less interest?

I don't know if this has any bearing on it, but we're currently on a 2yr fixed rate.

We are fortunate enough at the moment that we both have stable jobs (as far as we know) and we only have a small place anyway, so the mortgage is under £100,000 with a 35 year term.

Any advice much appreciated!

Vezella22

Ive tried and tested this tool post reading the post. Its really a nice one. I liked the keyword winner!

[Deleted User]

Yes - B is the better option, keeping your monthly payments the same, meaning that more of the capital is paid off with each monthly payment, and then of course your overpayment on top of that.

blueberrypie

mercmanricky wrote: »

I've been offered the following two options by nationwide.

A. Decrease my monthly payments immediately after every overpayment.
B. Decrease my mortgage term.

I presume that B is the better option overall? Surely it means that overall we'll pay a lot less interest?

Which method you choose doesn't actually make any difference to how much interest you pay in the end. You pay interest based on what you owe, and if you pay more, you owe less, therefore less interest.

There are pros and cons to the two options though. If you take option B, your payments will continue to be the same as they are now. If you're comfortably managing your payments every month, that's probably the best choice. If you want to be able to reduce how much you are *committed* to paying every month, option A is the way to go. It really depends on your own financial situation and whether you are disciplined enough to keep up paying the extra if your required monthly payment goes down.

You also need to take into consideration how much you are *allowed* to overpay. If, for example, your overpayments are limited to £500/month and you reduce your regular payment (option A), more of what you pay in each subsequent month will be considered an overpayment, possibly limiting how much you can overpay and/or incurring fees for overpaying by more than is allowed.

blizeH

Some good advice above, I personally went for option A since I figured if my circumstances change, and I lose my job, get my hours cut or whatever in the future, it'd make the payments a bit more manageable. Personally I see more benefit in that, than merely shortening the term.

It also means you'd potentially have more cash now if you need it - new car? holiday? You'd be in a much better position to save for them, since you'd be saving money each month on your mortgage.

(it's not unthinkable that if you kept up the overpayments, you should shorten the term via option A either btw)

bacard1

Why not go for option A, but when they decrease the mortgage why not overpay the reduced amount as well. That way if the worst happens, you can just pay the lower payment.

mercmanricky

Thanks for the confirmation. £500 is the maximum overpayment without penalty.

I've checked through my paperwork and if i go with B and i ever struggle to make a payment in the future i can always have a payment break and get all those overpayments back if i lose my job or whatever.

For the last few years, i've been planning for the future a lot more than looking for instant benefit, If i can be mortgage free in 9 years, rather than 35 years, that's great. Highly unlikely i'll make that overpayment every month for the next 9 years though!

Crashandburn

blueberrypie wrote: »

Which method you choose doesn't actually make any difference to how much interest you pay in the end.

Durr yes it does.

Are you saying a standard mortgage payment of £500pm plus £500pm overpayment ie option B is not going to save more interest than say the reduced mortgage of £480pm (ie the mortgage after the overpayments have been made) plus the £500pm overpayment??!!

You can also get the lender to change the term if eating into your overpayment allowance is an issue with the NW

blizeH

But you'd be getting interest on the money you'd be saving, or you could just use it towards further overpayments like I do.

I'd be interested to see the maths involved between option A and B over the course of the term though.

blueberrypie

Crashandburn wrote: »

Durr yes it does.

Are you saying a standard mortgage payment of £500pm plus £500pm overpayment ie option B is not going to save more interest than say the reduced mortgage of £480pm (ie the mortgage after the overpayments have been made) plus the £500pm overpayment??!!

No, and if you'd read what I wrote, you'd understand what I was saying.

What affects how much interest you pay is how much you owe.

If you pay £500 off your mortgage - *regardless of whether you call it a regular payment or an overpayment* - your mortgage balance is reduced by £500 and you pay interest on £500 less.

If you make a total payment of £1000 per month, it doesn't matter whether it consists of a standard mortgage payment of £500 per month plus an overpayment of £500 per month or of a standard mortgage payment of £480 per month and an overpayment of £520 per month. The effect on the mortgage balance, on the interest and on the date when your mortgage is finally paid off is exactly the same.

There may be terms and conditions on your mortgage - such as a limit of £500 per month on overpayments - which will affect which option is the best one in a particular borrower's circumstances, and I believe if you read my post again, you will see that I noted that this needs to be taken into consideration.

Thrugelmir

A 35 mortgage term is a long time. Personally I would use the overpayments to reduce the mortgage term to 25 years initially. Then reconsider my options.