Overpayments: reduce the term or monthly repayments?

DLISTER

Hi,

We are going to start working towards paying back our Mortgage asap and become debt free!

We have two options:

1. To use my overpayments to reduce the term and keep the monthly repayments the same.

2. Reduce the monthly repayments but keeping the term the same.

Which will reduce my mortgage the quickest?
Which would ensure the least amount of interest?
Or is it the same either way?

Thanks for you help,

Dlister

Cornucopia

As a general rule, the shorter the loan, the lower the overall interest. However, a lot comes down to the figures involved.

rob404uk

Hi,

The more you pay sooner the less interest you will pay, so if being mortgage free is your sole aim then pay as much off (leaving an adequate rainy day fund) as you can.

There are pros and cons with each approach. Personally, I would never agree to shorten a term if I was able to make overpayments. This is because if I lost my job my monthly repayments would be larger if the term was shorter. However if you , for example, had a 25 year term, but made overpayments, you would make your term shorter by overpaying. However, you would have changed this to 15 years and it was an inflexable term the monthly payments could be scarier in a time of crisis.

Something else to consider is your LTV ratio. If you owe 90% of the value, overpaying could get you a considerably lower interest rate on any future remortgage. In this case it could save you a considerable amount of money.

It would be hard to know what the best case would be without more information. The amount you owe, income, value of your house, current interest rate etc.

Hope this helps

financialbliss

Hi,

In this case - always your option one if you can afford it.

Option two is only pre-paying the mortgage and won't reduce your term.

I overpaid and kept the monthly payment amount the same, but I had the facility to drawn back the overpayments, so I used the mortgage account as a savings account, but didn't need to drawn back the funds.

FB.

DLISTER

Thanks for the replies.

Here is some more information:

House Value: 225,000
Mortgage: 190,000
Term: 2 Years
Interest: 4.39% (Fixed for 2 years)
Overpayments allowed up to £500.

At the moment I'm leaning towards reducing my monthly repayments, but before reading Rob404uk's post I was thinking about reducing the term.

I'm not sure how much I can over pay each month, but now I have a backup funds tucked away I figure paying off our mortgage is a better than any investment out there! Unless I'm really good on the stock market... which I'm not.

Rob404uk, thanks for your advice it was really helpful! Especially, with regards to reducing the monthly payments as a safety net incase the worse were to happen!

Thanks,

rob404uk

£500 a month, sounds like a nationwide mortgage to me. Providing house prices stay at similar levels, you will need to reduce your mortgate by around 10k to get below the 80% LTV mark. This could get you a much better deal second time round. The type of mortgate that financial bliss explains might be good for the future, although I have little knowledge of these.

Cornucopia

At (only) £500 overpayment, neither option really commits you to something irrevocable for the future.

DLISTER

Yeah, it is a Nationwide mortgage.

We'll work towards reaching the goal of 80% LTV and reduce the term of the mortgage.

We have IPB so if the worst happen that would cover me.

Thanks,

Carlos77

I (like most others who regularly) overpay, do so to reduce the term. Officially my mortgage has 17 years left to run, but with the over payments i am making this will be sorted in 3 years. I pay a set amount over the regular monthly payment, and at any time i can stop these payments and return to my minimum monthly payments. Nothing about the over payments are fixed in with the lender.

This, for me works out at a regular payment of £360pm and a regular OP of £900pm totalling £1260pm , so should i need to i can stop this at any time and drop back down to £360pm.

financialbliss

I'm not loyal to Nationwide, but their mortgage products aren't that bad.

Personally, unless you can beat 5.4875% in a savings account (which is 4.39% after tax), I'd push as much as you can towards the mortgage account if it were me.

With Nationwide, you can take the overpayments back - so you could effectively treat your mortgage account as your savings account paying 5.49% (4.39% after tax) for up to £500 a month.

FB.

katejo

financialbliss wrote: »

I'm not loyal to Nationwide, but their mortgage products aren't that bad.

Personally, unless you can beat 5.4875% in a savings account (which is 4.39% after tax), I'd push as much as you can towards the mortgage account if it were me.

With Nationwide, you can take the overpayments back - so you could effectively treat your mortgage account as your savings account paying 5.49% (4.39% after tax) for up to £500 a month.

FB.

I currently have a base rate lifetime tracker with Barclays/Woolwich with a very low interest rate. I am not currently paying overpayments as I decided to take advantage of the low interest rate to get my kitchen done. However I did make overpayments for a couple of years before that. I found that the lender automatically returned my monthly payments to the lower required amount at the end of each mortgage year unless I reminded them not to. I officially have 16 years left but hope to pay it off within 10 years.