Reduce term or overpay, which is best?

ms745

Hi all, new to the forum so I hope this is in the rightplace and not a daft question.

Wife and I are in our late 30s and have a mortgage of £189kand a second mortgage at a slightly higher rate of 22k (house extension). We’vejust reached the stage where we’re finally saving some money each month and aredesperate to reduce the mortgage as quickly as possible.

I was going to reduce the term from 19 years down to perhaps10. Affordable at present but might be a bit of a stretch especially if ratesgo up (although have saved 7k as a fallback if we’re short occasionally).

The other option though would be to keep the term andmonthly payment the same as it is and just look to make an overpayment for asmuch as we can each month (checked with Nationwide who said we are allowed todo this)

Is there much difference between the two and which wouldreduce the mortgage more quickly (assuming overpayments we made would be similar to extra monthly amount on a reduced term) ?

Thanks in advance for any advice

happycamel_2

If you aren't sure you can keep up the overpayments (and very few people are) you'd be best to overpay to the maximum you are allowed. On my mortgage that is 10% of the balance at 1st January but I know with some Nationwide mortgages it is £500 per month.

If the limit for overpayment is much less than you can afford then you might be better to shorten the term but check for early repayment charges. Also bear in mind that interest rates may change if you are on a tracker or SVR.

If the you overpaid by the same amount that your mortgage went up by if you decreased the term then the financial impact would be the same but by decreasing the term you _have_ to make the payment each month. With overpayments you can flex it a bit (eg if you went on holiday or had Christmas to pay for you may overpay less or not at all that month).

If you have more than one loan on the property make sure they attribute the repayment to the one with the higher interest rate.

ms745

Thanks very much for the advice happycamel

My understanding is that there’s no limit to the amount wecould overpay on the first mortgage and £500 a month limit on the second.

I was going to focus on attacking the larger mortgage first(189k at 2.5% svr) but from what you say we’d be better getting rid of the 23k at4.5% first

happycamel_2

yes, tackle the higher interest rate first, that will help you snowball the loan.

Basically when you over pay you reduce the capital balance of the mortgage (the bit the percentage is applied to). Then when they next calculate your monthly repayment less will be interest and more will be capital repayment. There's a calculator on here under "mortgages" which will show the effect of one off and regular repayments, you'll soon see the difference between paying chunks off the one at 4.5% rather than 2.5%. Throw all you're allowed to at the 4.5% and once you've hit the repayment limit on that anything extra can go on the other one.

I paid £5k off my 4.99% loan this morning, it'll save me £14k in interest on the lifetime of the loan and I'll finish repaying the debt more than 2 years earlier.

ms745

That’s a huge help and all makes sense. Thanks very much indeed for taking the time to give youradvice, much appreciated

joedenise

If you're only allowed to overpay by £500 per month on the 2nd mortgage make sure you don't pay off so much that you end up with early repayment charges - if you have a fixed rate or tracker until [x date]. I used the snowball calculator to make sure I didn't pay back our 2nd mortgage before the ERC came into play.

Now pay the same off both parts of our mortgage even though the main mortgage is much lower than the 2nd mortgage.

Will obviously up the overpayment on 2nd mortgage once we're outside the ERC period.

Denise

ultrarunner

The other thing to consider is that your larger loan at 2.5% is subject to the variance of Bank Rate, whereas the other is fixed.

Depending on the length of the fix, it may be wise to divert some money to limit your exposure to a sudden rise in Bank Rate (admittedly this is probably a few years away but who knows).

I am with Nationwide also and have the same condundrum (although my values are £68k at 2.5% and £60k at 4.09% it still weighs on my mind a little).

ms745

Thank you both for these other points to consider. I willcheck when the fixed rate comes to an end and if other ERCs exist.

Good point re rate changes on the first mortgage, will havea think about this as well

Many thanks for your help