Overpayment and reducing term?

InMyDreams

Bargain_Rzl wrote: »

I'm still wondering whether I've missed something obvious...

Hi Bargain Rzl, no I don't think you have. As you said, if you are only allowed to make overpayments of a certain amount and you want to overpay more than that, then it is helpful to reduce the term so that the regular payment is more to start with. Another advantage is a psycological one I suppose... seeing the 'official' end date draw ever nearer is an incentive to keep up with it. Shortening the term effectiviely locks you in to maintaining those overpayments whereas if you are working out a 'virtual' end date based on your overpayments, there's always a temptation to spend that money on other things during the month instead of your mortgage. I guess it depends how disciplined you are with it all and how tough you want to be on yourself.

GreenNinja

Many thanks In my Dreams for such a well explained response to my question, I now understand perfectly when before I was confused!

The outstanding amount on my mortgage is 30K but I don't earn very much and live alone. I am allowed to pay 10% of the capital back this year and next without charges as I am tied in to a 2 year tracker mortgage but after that I can pay what I want off the capital. 3 grand for this year is probably the maximum I could pay back to be fair anyway.
In answer to your question I do have an endowment policy which currently stands at 10K so I am hoping this will go up some more in the next 12 years anyway.
My plan would be to pay off the capital then use that endowment money as a pension.

Many thanks again for your advice.
Jane

123456

Green Ninja

I'd also like to reassure you that you are on the right track.

We have been making regular 'capital repayments' (Abbey stipulate that you have to specifically state this when making a payment) on an IO mortgage of £41,000 over 6 years and have just made the final payment to clear the mortgage. Our payments varied between a lump sum once per year (when, like you, we were tied in to a max 10% a year because of a capped rate deal), to regular payments of the minimum £500.00 per month when we could afford it and had no yearly limit.

Each time we made a capital repayment, the monthly repayment amount reduced and so we ploughed that monthly saving back into saving for the next capital repayment. The monthly repayments gradually reduced from over £200 in 2001 to £12.83 in the last month.

When we took out the mortgage, we deliberately chose the longest term possible (25yrs) in order that this would give us the lowest possible monthly repayments so that we could save money in our own bank account knowing full well that we would pay off the loan well before 25yrs was up. Like someone else said, the concept of 'term' is academic.

We too have an endowment originally taken out to pay off the loan and will keep it running till it pays out (hopefully) to use as pension savings.

Good luck!

catsonic

Hi can i jump in this thread too?

Im with nationwide and have 18,000 left to pay and 12 years left on morgage. Hubby is due some money in a few weeks and we wanted to use half to pay about 8,000 off the morgage. We then want to up our monthly payment from 160.00 upto 500.00 per month. would we be allowed to do this?

So we would have 10,000 left on morgage and interest is 6.74 and we were allowed to pay 500.00 per month it would take about 2 years to pay off? is that right?

InMyDreams

GreenNinja wrote: »

In answer to your question I do have an endowment policy which currently stands at 10K so I am hoping this will go up some more in the next 12 years anyway.
My plan would be to pay off the capital then use that endowment money as a pension.

Sorry GreenNinja, I meant it as a rhetorical question; to show a potential downside of reducing the term of an IO mortgage. But yes, there's no reason not to aim to pay off the mortgage before the endowment matures and hopefully put the money to something else, be it retirement, kids' university costs or even to help with deposits for their own first homes...

GreenNinja wrote: »

Many thanks again for your advice.
Jane

Eek.. I hope I didn't give any advice! :rotfl:

Oddgy

Hi There,
I have been reading this thread, it is so very interesting. One question i would like to ask, instead of overpaying the selected amount to the mortgage provider, what about paying the amount into a bank account, (as long as you can be disciplined not to touch it), and then when it comes to remortgaging, use the funds from that bank account which you have saved up to reduce the debt.

Sureley, this way, stops the banks from using that overpayment you have given them each month, to hide the fact that they are adjusting your monthly payment which has been arisen from the fact from this thread?

Have i confused you, as i dont think ive explained what i mean correctly??