capital repayment or overpayment

Reevsey

Is it more cost effective to make a capital repayment to reduce the mortgage amount or use the same money to make an overpayment which reduces the term length? I'm a bit unclear so any advice welcomed. Thanks:)

The_Doctor_3

Hi Reevsey

In effect, an overpayment and a capital repayment are the same thing i.e. you repay the capital you borrowed from the lending institution.

Some lenders will recalculate the value of your repayments to fill the remaining payment years of your mortgage. So if you had repaid 50% of your mortgage in one foul swoop (wouldn't that be nice), Bank X may reduce your payments for the remaining 20 years from 1000 per month to 500 per month.

My advice to people is to keep as much flexibility on your side as is possible. Thus if reducing the payment amounts by half has the unintended consequence of also reducing the amount of your overpayments (especially if it's a % of the monthly standard payment), don't allow your lending institution to change the amount.

An alternative scenario is where you could opt to keep your payments at a fixed level throughout the mortgage until it's finished. You have to respond according to your personal preferences and lenders rules as regards payments.

The dream scenario is where you can make unlimited overpayments , without any penalties and when you see the finish line ahead, it's only you who decides when that day will actually arrive.

For me, my golden rule is to make sure I am never boxed in to repaying substantially increased monthly repayments as I wanted to reduce the mortgage term. I would always want to keep the repayment term as it's original value and then to overpay when I could.

In summary, if you make an capital repayment (=overpayment) and your interest is calculated daily, my advise would be to allow the bank to reduce your monthly payments - provided - I was not restricting my overpayment behavior subsequently.

I hope that hasn't left you more confused than before!

Reevsey

Thats really clear thanks so much The Doctor. I was wondering I guess if it was cheaper overall to reduce the term period with an over payment or whether it was cheaper to make a capital repayment and have lower following monthly payments following. I think what you have said is that t makes no difference. I a completely flexible mortgage with ING and have the 2 options available with no penalities and was wondering which to take advantage of. Can't agree more with your comment re retaining flexibility - its crucial for me too. Thanks again I really appreciated your help.:)

Twiddy

Hi Reevsey

Just to re-iterate the excellent post by The Doctor, I would also add that to increase the flexibilty further, see if you can "get at" any overpayments you make which in effect creates a credit situation in your mortgage account for times of trouble i.e. if you need some of that money back to clear an unexpected debt, or you need to take a payment holiday for any reason.....

Other than that, follow The Doctor's prescription!

All the best
T

Reevsey

Twiddy - thanks for the good wishes and yes this mortgage does have the credit bank option you describe. You are spot on, I had been under threat of redundancy for the past 2 years, it was a major stress and have only recently been offered a bit of job security but the future is never certain its so true. I feel for the first time in a while that I have a really great mortgage, fees were steep but so worth it to have completed flexibility and no further future fees. Thanks again.