pay off the capital or the term ?

mirry

My husband and I seem to disagree.

We are about to start making over payments and I want the over payments
to help pay our mortgage off early.
But my husband wants it to lower our mortgage payments now .

which would save us money in the long run ?
would it be the same?

james3333

pay off capital to reduce the term.

jamesd

The effect it has depends on what you do. If the minimum required payments decrease but you still keep on making the same payment amount, the two options are identical in terms of mortgage payments. If reduced payments are made, your plan is cheapest.

Your husband has the most flexible plan if the intention is to continue making the same payments. The reduced minimum payment with the same term means that if there is a financial problem later you can easily reduce the monthly payment to that required level without any need for permission from the mortgage company.

I suggest that you keep the term the same, since it gains you valuable flexibility and there's nothing saying that you have to reduce the payment amount unless your mortgage limits overpayments.

Your best long term option is probably putting the overpayments into equities in a stocks and shares ISAs, but if you don't like uncertainty it's not for you. Or maybe a mixture of this and overpayments.

If you think that equities always rise and fall by large amounts, take a look at property funds that invest in real property, like Norwich Property Trust. The dip in the red line before July 2006 is the stock market drop we had then. The blue line is how that property fund responded: not even a ripple. Yet over the last 5 years it grew by an average of 13.8% each year before fees and costs of 1-2%. Or there's the Baillie Gifford High Yield Bond which just leveled out a little for a while and grew by an average of 11.1% before fees and costs over the last three years. No guarantee that they will continue to do that but they do show what's possible if you select a low risk (meaning variation) level.

bootman

Reduce the term. you will get rid of your mortgage much quicker. Every lump payed off will probably knock off months if not years. I use the nationwides mortgage calculator to work it out.

mirry

Thank you for your replies,
Because of our situation, we have worked out that we will be able to pay off an extra £4000 a year, for the next 3 years.
After that, our income will drop and we may not be able to make over payments. We still owe the mortgage £40,000 and have another 15 years.

So if we take an extra £12000 off it , in the next 3 years, it should make a difference.....hopefully.

webbie

Just check that by asking the mortgage company to reduce the term each time, they are not charging you. Some (I think most) will charge around £50 - £80 admin to "officially" reduce your term and recalculate payments.

jamesd

bootman, all that matters is the amount being paid, not the nominal term.

Some people reduce the term to try to force them to do it or to get around 10% overpayment limits but it reduces flexibility - now needs lender agreement to go to the original lower payments - and isn't a good idea if it can be avoided. Better to retain the term and be able to go lower immediately if temporarily unemployed, say.