Over-payment vs Reducing Mrtg Term.. Confused

Shortie

Hi everyone

Hoping you knowledgable bods would be able to point me in the right direction again

We've made the decision on our mortgage product now and have put in the application. We're going for the Halifax 2 yr fixed rate at 5.49% as we like fixed rate mortgages and this is a pretty good deal (they're pulling the rate on Sunday as it goes).

I thought we had the remaining balance of £162k on our existing mortgage but was grossly wrong and it is actually £152k :T . As we're going to be changing the application down the line to reduce the mortgage amount, it got me thinking about the affordability of the reduced amount and what we could do with the spare money. I've probably got this completely *rse about face but was hoping for some pointers:

Current application details (once value corrected): repayment mrtg, term 21 years, monthly payments £1,017.

We have £1,111 that I had mentally put aside to spend on the repayments before we started looking as this is 'spare' money left over each month in our joint bills accounts..... I'm more than willing to spend it on the mortgage still.

Should we go for:

(a) repayment mrtg, term 20 years, monthly payments £1,045 (this is still lower than the orig repayments on the £161k I quoted to the IFA, hence I thinking an option...)

(b) repayment mrtg, term 18 years, monthly payments £1,109 (this is within the £1,111 I was prepared to spend)

..... how can I work out the material impact of reducing the loan term? I tried to use the mortgage calc stickies and got a bit confuggled..

(c) repayment mrtg, term 21 years, monthly payments £1,017 (current application quote when we adjust the loan amount) and then overpay the mortgage each month by nearly £100.

Option c I threw in because I'm not sure if reducing the mortgage term vs overpaying have the same ultimate effect on the total mortgage interest to be paid or if one is better than the pther

Thanks again :beer:

firesidemaid

it depends how flexible you want it to be.

personally i would put it down to the 18 years and the amount you were expecting to pay. it is very easy not to overpay for one reason or another.

i regretted not doing that for the last 2 years (am doing it now).

good luck x

groatie_queen

I agree with sazzacat to reduce the term to 18 years - it's still affordable, and chances are further down the line you'll be very glad you did it!

Best wishes
GQ

InMyDreams

Shortie wrote: »

Option c I threw in because I'm not sure if reducing the mortgage term vs overpaying have the same ultimate effect on the total mortgage interest to be paid or if one is better than the pther

Yes, they do. What's important is the total amount you pay off each month, regardless of how much is regular or overpayment. Reducing the term means your regular payment goes up so what you can overpay (over and above that) goes down. If the total you hand over is the same then there is no difference in outcome between the two methods.

The advantage of reducing the term means that you are tied in to the larger payments (so you can't wimp out or get tempted and blow your money on something else).

The disadvantage of reducing the term means that you are tied in to the larger payments (so less flexible should finances become tighter).

pete_w_924

Also remember that many mortgages have a limit on overpayments, so if you can commit to the higher payment, then reduce the term as it will allow more overpayment in the future.Cheers, Pete

Shortie

Thanks everyone. I'm still really undecided..... Speaking to my Dad last night he said he'd stick to 21 years and set up a Standing Order to overpay each month as like InYourDreams says, it doesn't make a diiference in the long run (thanks for clarifying that one)

But..... I'm worried I might use it for other things if I don't stick myself to it, but.... I lose the flexibilty... Maybe a Standing Order is the best way forward.

With Halifax I can overpay 10% a year without attracting fees. I know therels no way I'll have my hands on an extra £15k in a year so I'm okay with that, but it was a good point pete_w_924, cheers for bringing it up.


Hmmm..... okay the wood's burning now.... :rotfl: . If I set up a standing order for £100 a month, I'm usually very good at not touching these "just because I can", so it'll be pretty much guarenteed over payment with the added flexibility if needed (we have a new baby on the way end of August). But also, if we DO have extra money one month over and above the £100, I could increase the Standing Order for that month much easier if it's already in place...

Thanks everyone :T