Shorten Mortgage Term or Overpay?

littlelostkiwi

Hi,

This may seem like a silly question to most, but mortgages are not my strong point so hence the post to those for whom it is!

We are coming to the end of our 2yr Fixed Term mortgage with RBS where we had a whopping rate of 5.7% (thanks to my visa status).
Our Mortgage broker has recommended Accord Mortgages for a 2 yr fixed term rate of 2.89% - a far cry better than what we are currently paying (I am still restricted to certain lenders because my visa finishes in June 2012).

We set aside £1000 per month for our mortgage currently (monthly payments with RBS are £986) and were still wanting to set aside the same amount if we were to go with the 2.89% 2 year fixed option with Accord. Our current mortgage with RBS was taken out on a 35 year term and we have been quoted a monthly repayment amount of £677 with the Accord option over 33 year term.

What we were wondering is whether it is financially more adviseable to reduce the term to 23 years (paying £857 monthly and perhaps over paying by £150 a month) or to stick with the £677 per month on a 33 year term and saving £350 towards either a deposit for a new property or making maximum overpayments possible and saving the rest.

Can anyone please recommend which would be the better option (or even make an alternative suggestion) as to how to make the best use of our mortgage money.

BTW - we are probably going to look to move to a bigger property in approx 18-24 months time if that influences the above decision.

Many thanks
Allison

joedenise

If you're going on to a fixed rate you need to check first of all whether you can actually make overpayments because on some mortgages you can't (probably why it's called a fixed rate!). If you can then I would go for the longer term and overpay as much as possible because if you shorten the term and then the interest rates increase significantly you'll make a good gain.

I think it also depends on what LTV you have as to whether it would be better to save for a bigger deposit for a larger house. You obviously get far better deals with a lower LTV.

Denise