Effects of overpayment

2nd_mortgage

Hi all,
I am sorry to ask a question about a topic that has been discussed here before but after having read quite a few threads about overpayments I am still confused

I have a First Direct 5 yrs fixed mortgage which allows me unlimited overpayments.
Just 15 days after the start of my mortgage some of my fixed term investments matured & I was able to pay off 15% of my mortgage amount.
The choice I had was to either reduce the monthly payment or the term.

For the sake of ease, if we assume that my monthly payments are £1000 & by making that overpayment they can be dropped down to £800.

I had assumed that the payment would drop down and I had intended to keep paying £1000, thus overpaying by a further £200 every month. My intention was to pay off as much as I can in the 5 year term while the interest rate is low.

But First Direct told me that their default position is to reduce the term.
So I am not sure what is the better option.

In 5 years time when I have to re-mortgage, I want the amount to be as low as possible.

Thanks in advance.

ValHaller

Reduce the term => Keep the monthly payment the same
Reduce the monthly payment => Keep the term the same

It seems to me that you want to reduce the monthly payment and pay the extra in anyway. So effectively you are keeping the monthly payment the same which is reducing the term.

If you want to reduce the monthly payment to cut yourself more slack, then that is no bad thing - you will then need to make the extra payments manually as you accumulate a surplus.

2nd_mortgage

Thanks for your reply.
Is it possible that I end up owing more in 1 scenario compared to the other.

For eg :
Scenario A - keep monthly payments same & reduce term
At the end of my 5 years fixed rate term they say that I owe £100,000 but the remaining term is reduced to 16 years instead of 20 as I made extra payments & reduced term

Scenario B - keep term same
They say that the remaining term is 20 years but now I owe them only £80,000 due to all the extra payments made.

I think it can't be that way but just want to confirm.

Thanks again.

ValHaller

If you actually pay in the same amount each month under the 2 scenarios. at the end of 5 years there will be no difference in the amount owing. The difference is at 5 years you will either pay the same on a educed term or less on the same term

dimbo61

You have a great mortgage product with FD , not the interest rate which I don't know but the flexability to make unlimited overpayments!
The default position of FD to keep the payments the same but reduce the term is the quickest way to pay the mortgage off early and save the most in interest payments.
Well done FD and keep up the overpayments if you can

StuC75

Both would result in the same balance at the end of the products period.. When you then switch deals the term can easily be tweaked..

The only difference being the payment amount that you are obligated to pay in (£800 vs £1000).. Keeping the payment the same makes less admin work for the lender; rather than keep recalculating how it should change..

2nd_mortgage

Thanks again.
I agree FD have a nice product. I got a very good interest rate too - 2.49% fixed for 5 years (65% LTV).

redonion

2nd_mortgage wrote: »

I had assumed that the payment would drop down and I had intended to keep paying £1000, thus overpaying by a further £200 every month. My intention was to pay off as much as I can in the 5 year term while the interest rate is low.

But First Direct told me that their default position is to reduce the term.
So I am not sure what is the better option.

This is important because it has a real effect on affordability calculations.

Despite doing quite a lot of research, I had no idea that some mortgages work this way, thank you for posting about it.