Lump sum overpayment - reduce term to maintain regular OPs too?

northern_at_heart

I've read a few threads about reducing the term vs. reducing monthly payments when making a lump sum OP, but I just want to run this by the wise people here for a sanity check!

We have a 5-yr fix capital repayment mortgage with Yorkshire BS. Balance is 169K and it has 22 years left.

We're allowed to overpay 10% of the outstanding balance each year (defined as 3 Dec–3 Dec, as that's the anniversary of the mortgage)

We've been OP-ing small amounts each month by setting our DD higher than the minimum amount. The actual payment is £876 and we've been paying £1100.

Owing to a windfall, we're now able to throw the full 10% at it in one go, which YBS tell us is £13K (taking into account the OPs we've already made this year). Once we've done this, I assumed we would have to stop paying the regular OPs and we'd just have to revert to paying a lower (recalculated? Would they do this straight away?) amount, stashing the difference in savings until after 3 Dec when we can OP again.

But then I thought, if there's the option to reduce the term instead, then maybe this our actual (ie. minimum) payment could stay higher, and we could be paying more off each month (as it wouldn't be counted as OPs, it would be counted as the normal compulsory payments). As our mortgage rate is higher than our savings rate I think this would be better?

Would YBS do this, do you know? Is this the right thing to do? It seems strange to want a higher minimum payment but our aim is to get the balance down as fast as possible before the 5-yr fix runs out and we want to remortgage or move.

Thanks for any help you can give me!

northern_at_heart

Bump... any thoughts, anyone?

lulabelle1

The only disadvantage that I can think of in regards to reducing your term, is that your new payment would be mandatory rather than consisting of Overpayment and therefore couldn't be borrowed back (assuming that you're able to borrow back payments with your particular mortgage) at a later date.....

If this does not matter to you, then reducing the term makes perfect sense if you are limited by your lender to the amount that you can OP per annum.

Most lenders allow you to amend the term (as far as I know) but most will charge an admin fee.

northern_at_heart

Thanks - yes, we are able to borrow back overpayments. I see what you mean. Hopefully we'd never need to borrow back more than the amount that actually was an OP (ie. the 10% chunk).

Will give YBS a call and ask about amending the term.

Caveat_Mortgagor

I think you've missed something.

If you overpay and dont reduce the term, then the regular payments would be re-calculated ie lower than £876.

If you reduce the term you will be able to keep the payments at £876.

I cant see any way that you can pay your full allocation of overpayments for the year and also keep paying £1100 per month.

northern_at_heart

Hmmm. I'm getting in a muddle with the maths now!

I guess reducing the term to what they offer would mean the payments remaining the same at £876. To increase the mandatory payments we'd have to request to reduce the term more than the effect the lump sum OP would automatically have, which a) might not be possible and b) would probably have an admin charge. Is that what you mean? Sorry to be dim!

Mrs.T20

Can you reduce the term to the amount you can comfortably afford monthly? We did this and have never regretted it. Our decision was based upon the fact that if we have spare cash, we spend it! We will be mortgage free next year and it would never have happened if we had not reduced the term.

SG27

I'm with YBS too. They told me that any one off payments will not reduce the term but reduce future payments instead. These will be recalculated at the annual statement date. Only regular OPs reduce the term.

But as you are paying a fixed amount your actual payments next year will stay the same at £1100 but you minimum payment will reduce meaning that next year you will be paying the same monthly but making more of an overpayment.

It's quite confusing actually!


If you have 22 years left and make a £13k OP then (I think) 13000/264 months will mean your payments reduce by £49.24 per month so basically you'll be keeping the £1100 payments the same but be making an extra £49.24 per month regular overpayment which will reduce the term...