£790 over 15 years or £746+overpayment over 14 years?

Bluefusion

Our mortgage is up for renewal and we are looking at a 5 year fixed deal around £800 per month.

We have the option to make overpayments, but is it better to pay more over 14 years or slightly less over 15 years and also make an overpayment, or is there no difference?

OPTION 1
5 Year Fixed @ 2.74% for a 14 Year term = £790pm

OPTION 2
5 Year Fixed @ 2.74% for a 15 Year term = £746pm +£44 overpayment each month (same as £790pm)

Do these amount to the same amount at the end of the 5 years, or is one option better than the other?

Thanks.

lee111s

It makes no difference at all.

bowlhead99

If the interest rate they are charging you is the same, then you paying the same amount of money each month (i.e. £790) has to have the same effect on the remaining capital no matter whether you had agreed it as a 14 year or 15 year or 25 year mortgage.

Every month, an amount of interest is added to the principal that you owe them. The first bit of your monthly payment clears the new interest charge, then the second bit of your monthly payment pays off some of the principal.

In your case, in month 1 the interest is going to be about 250 quid so if you give them a total amount of 790 you will clear 540 of principal. It doesn't matter if that 790 payment is because you have to give them 790 or because you have to give them 746 and choose to pay more.

The principal will still reduce by the same amount because once you've given them that minimum 250 quid of interest, a pound paid is a pound knocked off what you have to pay in future and it's a pound knocked off what they are charging you the interest on.

If you are going to go the 'lower minimums but overpay', I suppose one factor is that if you at some point have a lump sum of cash available and want to make a really big overpayment, you might run into a cap of what you can pay off early without penalty. For example some lenders allow a maximum percent overpayment per year, others a maximum cash amount per month, etc.

So if you wanted the potential to pay off the highest possible amount after a couple of years or so, and their limit is 500 a month overpayments, you would be better doing 790 fixed payments plus 500 overpayments, than 746 fixed payment plus 44 'normal' overpayment plus 456 maximum extra overpayment before penalty.

Conversely if you think you may have some hardship or emergency down the road, locking into a lower contracted monthly amount would be better because you won't run the risk of defaulting when times are tough, and the lender might even allow you to make underpayments if you already built up a substantial overpayment balance.

I took a longer term with the intention of paying it off at the speed of a mortgage 3+ years shorter, but didn't want to be legally committed to the higher monthly amount.