to reduce term or not?

moneysavinggirl40

As reducing term costs £35, what's the advantage of having a reduced term in your contract, if i op anyway then term will be less or do lenders expect you to string it out so that you stick to your term which is in writing? i suppose they charge u an early repayment fee..which maybe cheaper for me if every 2 years my term is reducing and so i have to pay £35 each time.

SillySod

Reducing the official term is imo only interesting if the bank limits the amount of overpayments you can make (e.g. 10% of balance over a year), and you would like to overpay more.

£35 is normally a good deal compared to early repayment charges, but the downside is that you are then committed to the higher monthly payments.

moneysavinggirl40

SillySod wrote: »

Reducing the official term is imo only interesting if the bank limits the amount of overpayments you can make (e.g. 10% of balance over a year), and you would like to overpay more.

£35 is normally a good deal compared to early repayment charges, but the downside is that you are then committed to the higher monthly payments.

'imo' what does this stand for?? yes it is 10% of balance per year but why would reducing term affect this?

moneysavinggirl40

SillySod wrote: »

Reducing the official term is imo only interesting if the bank limits the amount of overpayments you can make (e.g. 10% of balance over a year), and you would like to overpay more.

£35 is normally a good deal compared to early repayment charges, but the downside is that you are then committed to the higher monthly payments.

just worked it out in my opinion:o

SillySod

moneysavinggirl40 wrote: »

just worked it out in my opinion:o

:T :j


Say your balance is £100K and your standard monthly mortgage payment is £500, and you have an overpay facility of 10% of the balance in a given year.

So you *have* to pay 500 pm. And, if you spread your permitted overpayments over the year, you with the necessary resources you could additionally pay up to £833 pm (total monthly payment £1333).

If you are rolling in it and want to overpay more, this would cost you a lot in early repayment charges as it would exceed the 10% limit.

So you could pay the £35 fee and reduce your term (providing the bank accepts). This has the consequence that your obligatory monthly goes up to, say, £750.

The upside is that you would now be able to pay up to £1660 pm (750 fixed + 910 overpayment) before incurring early repayment fees.

The downside is that your *minimum* payment has gone from £500 to £750.

moneysavinggirl40

yep An early repayment charge if you overpay by more than 10% of loan amount. that's right. But unfortunately i can't see the relationship of officially having a reduced term or just keeping it the same. I understand that if the term is longer then the monthly 'have to pay' amounts are less so more room to overpay but when the term is shorter there is less room to overpay as you maybe stretching your budget.

Lets say the term was 20yrs but years of overpaying has reduced it to 10, then come to paying it off 10yrs earlier even if the term says 20 whats the big deal? i've kept within 10% of overpaying loan amount. or is there a charge ie. early repayment charge when the term says 20yrs but i've paid it off in 10?

Beckyy

You've summed it up yourself really, there's no need to reduce the term - you'll pay it off early if you OP anyway. You'll only encounter an early repayment charge (ERC) if you overpay more than the allowed amount within the fixed period (ie. first 2/3years of taking out the mortgage). After that period there is generally no ERC, however the interest rate isn't fixed anymore so most people remortgage to get the security of another fixed rate.

This is assuming you have a fixed rate mortgage for 2 or 3 years.

moneysavinggirl40

Beckyy wrote: »

You've summed it up yourself really, there's no need to reduce the term - you'll pay it off early if you OP anyway. You'll only encounter an early repayment charge (ERC) if you overpay more than the allowed amount within the fixed period (ie. first 2/3years of taking out the mortgage). After that period there is generally no ERC, however the interest rate isn't fixed anymore so most people remortgage to get the security of another fixed rate.

This is assuming you have a fixed rate mortgage for 2 or 3 years.

so to confirm ERC only applies if i overpay more than the allowed amount.so initially if i have a 20 yr term and because i overpay have got the potential to finish paying mortgage in 10years, come year 8 when i remortgage for another 2 year period, if i finish paying the mortgage within the 2 year initial period there won't be a ERC, maybe a closing fee though?

pinkteapot

moneysavinggirl40 wrote: »

so to confirm ERC only applies if i overpay more than the allowed amount.so initially if i have a 20 yr term and because i overpay have got the potential to finish paying mortgage in 10years, come year 8 when i remortgage for another 2 year period, if i finish paying the mortgage within the 2 year initial period there won't be a ERC, maybe a closing fee though?

Yep.

Personally I'm a fan of having as long a term as possible (as long as you're disciplined at OPing) as it means your 'minimum' repayment is lower, so it's a bit of cover in case of unforeseen circumstances. We're taking ours out for 28 years (maximum we're allowed) but hoping to pay it off in half that time.

The only limiting factor, as others have said, is if your product has an OP limit. Even then though, you could save your excess OPs in a savings account and whack them onto the mortgage when the fixed term or whatever ends (before moving onto a new deal).

We're getting a lifetime tracker mortgage, one of the reasons being that there's no OP limit from the start, and no ERC at any point either.

moneysavinggirl40

pinkteapot wrote: »

Yep.

Personally I'm a fan of having as long a term as possible (as long as you're disciplined at OPing) as it means your 'minimum' repayment is lower, so it's a bit of cover in case of unforeseen circumstances. We're taking ours out for 28 years (maximum we're allowed) but hoping to pay it off in half that time.

The only limiting factor, as others have said, is if your product has an OP limit. Even then though, you could save your excess OPs in a savings account and whack them onto the mortgage when the fixed term or whatever ends (before moving onto a new deal).

We're getting a lifetime tracker mortgage, one of the reasons being that there's no OP limit from the start, and no ERC at any point either.

yes thanks for discussing what you're doing, putting any excess op savings into an isa or regular saver is a good idea if you reach your 10% overpaying limit. keeping a longer term means u have the flexibility to fall back to lower payments ie without overpayments if you're on a tracker and the base rate increases or you another senario would be if u just needed extra cash that month. Do you use standing order overpayments? how do you overpay?

SillySod

With NatWest I overpaid by Visa. Unfortunately I didn't manage to find a cashback credit card that they would accept.
Around the time I was doing that, it was reported in the news that a shocking amount of people were using credit cards to pay the mortgage... I wonder if their questionnaires covered whether the CC would be paid off in full each month.


As for term, on my BTL the term is about 10 years with a monthly payment of about a quid a month, so by 2024 the £200 closing fee should be less painful