Reduce the term or reduce amount?

davidscot

Just looking for some pointers here.
Went into building society to enquire about the procedure regards making overpayments towards mortgage (do we need to fill forms etc etc) Anyway, the cashier informed us that the process is easy enough we just need to say whether we want to 'reduce the term or reduce the amount' everytime we make an overpayment.
Thinking of setting up a standing order to make overpayments so do we need to inform them every time we make a payment?
Thanks for any help here.

dimbo61

I would ask them to keep the mortgage payment static! that way you are paying the same amount each and every month and in effect reducing the term.
Now if you can do this for the next couple of years and something happens ( cut in hours, change of job to lower pay) you can then ask for the mortgage payment to be reduced ( because of overpayments)
This is the best way to save Thousands of pounds in interest over the term GOOD LUCK

davidscot

dimbo61 wrote: »

I would ask them to keep the mortgage payment static! that way you are paying the same amount each and every month and in effect reducing the term.
Now if you can do this for the next couple of years and something happens ( cut in hours, change of job to lower pay) you can then ask for the mortgage payment to be reduced ( because of overpayments)
This is the best way to save Thousands of pounds in interest over the term GOOD LUCK

Yes thats what we were going to do, set up a standing order for the same amount each month. Its just the way it was explained to me that we would have to say term or amount each time. Maybe I picked it up wrong but will go back and double check.

Catslovelycats

David
Check that the payment can be sent separately from your normal monthly payment.
My bank insist on changing their payment rather than me sending an additional one - I just noticed I've ahd debit interest charged to me for sending overpayments separately!!
I agree with the others - reduce the term.

davidscot

catslovelycats wrote: »

David
Check that the payment can be sent separately from your normal monthly payment.
My bank insist on changing their payment rather than me sending an additional one - I just noticed I've ahd debit interest charged to me for sending overpayments separately!!
I agree with the others - reduce the term.

I was going to set up separate d/d to make these overpayments not lump it in with monthly mortgage payments.That way if things change I could stop the d/d and just continue paying as now.

JimmyTheWig

Certainly with one-off payments with Santander you have to tell them each time you make an overpayment not only how you want them to recalculate things but even the fact that it is an overpayment. Otherwise they will treat it as a regular payment and reduce your next direct debit by the whole amount you overpaid!

Don't know what the deal is with your bank, however, or with standing orders.

davidscot

I'm with Nationwide and will have to go back and double check this.
Be a bit of a hassle having to tell them every month where overpayment has to go.

brizza

I would be tempted to reduce the amount you are paying, rather than the term.

Logic:

If you are able to make overpayments, without any penalty, then why take away your flexibility by reducing the term and forcing your repayments to remain at the current level? Why not reduce the payments and have a bit of rainy day leeway?

If you keep the same term, your monthly repayments will reduce - giving you a bit of flexibility in a "worst case" scenario of illness/unemployment/unexpected expense.

BUT - providing things remain rosy, which they clearly are at the moment as you're able to overpay, you can merrily keep overpaying for the time being. So your overpayment going forward would be your current level of overpayment, plus the difference between the old and new mortgage payments. The beauty being that you'd still repay the mortgage at the same rate as if you took the reducing term option, so long as you can continue to make charge-free overpayments.

The only downside I can see if that potentially you could get "lazy" with the lower level of repayment which you're committed to with the reducing payments option and fritter away some of the money which you'd otherwise be forced to repay - but I'd be surprised if that were the case, if it were then you'd not be on here debating the different merits of your situation!



Just thought it'd be useful to consider a different option to those put forward above. You've probably already seen it, but Locoblade's spreadsheet is awesome for fiddling around with this sort of thing. It's probably easier to see what I mean by looking at the raw numbers! (Hah, just found that I can't link to it because I'm a new member.)

JimmyTheWig

Brizza's suggestion is possibly limited by the amount you are allowed to overpay each year / each month. If you're getting close to this limit then you definitely want them to reduce the term.

It also relies on you upping the overpayment each month. Given you don't want to contact them each month, this might be off-putting, too.

But in terms of flexibility, it's a good plan.
Ultimate flexibility would be an interest-only mortgage, using overpayments to clear the balance.

cabbage

I'm with Nationwide too and overpay by £500 per month. I do this all online and there's an option on one of the online banking pages that asks if you want to reduce the term or your payments. Once it set, it continues that way until you change it.

davidscot

brizza wrote: »

I would be tempted to reduce the amount you are paying, rather than the term.

Logic:

If you are able to make overpayments, without any penalty, then why take away your flexibility by reducing the term and forcing your repayments to remain at the current level? Why not reduce the payments and have a bit of rainy day leeway?

If you keep the same term, your monthly repayments will reduce - giving you a bit of flexibility in a "worst case" scenario of illness/unemployment/unexpected expense.

BUT - providing things remain rosy, which they clearly are at the moment as you're able to overpay, you can merrily keep overpaying for the time being. So your overpayment going forward would be your current level of overpayment, plus the difference between the old and new mortgage payments. The beauty being that you'd still repay the mortgage at the same rate as if you took the reducing term option, so long as you can continue to make charge-free overpayments.

The only downside I can see if that potentially you could get "lazy" with the lower level of repayment which you're committed to with the reducing payments option and fritter away some of the money which you'd otherwise be forced to repay - but I'd be surprised if that were the case, if it were then you'd not be on here debating the different merits of your situation!



Just thought it'd be useful to consider a different option to those put forward above. You've probably already seen it, but Locoblade's spreadsheet is awesome for fiddling around with this sort of thing. It's probably easier to see what I mean by looking at the raw numbers! (Hah, just found that I can't link to it because I'm a new member.)

Think i'd prefer the reduce term route because as you say I could get a little 'lazy' with the extra cash saved. Appreciate your logic but think this would be my preferred option.