Fixed deal ending 29 May 2014 at 1:22PM in Mortgage-free wannabe 4 replies 462 views

Sally_Cinnamon_78

Hello all, I’m new on here today. I’ve recently paid off all my debts and my thoughts are turning to my mortgage.

In Dec 2010 I took out a 30 year capital repayment mortgage for £116,450 to buy a house which cost £137,000.
I’m currently on a 2 year fixed rate deal which ends in Dec this year. The monthly payments are £577.06 and the APR is 4.29%.
At the moment I owe ~£108,000 and have 26 years left. The current value of the house is £135,000 i.e. 80% LTV.
I’m in the fortunate position of currently being able to overpay my mortgage by £500/month (this is the maximum allowed on my mortgage without penalties) which I have been doing for the last few months. I’m trying to get my LTV down so that I can get a lower interest rate when my fixed deal ends.
The LTV will hopefully be <75% when my deal ends. However, if I get a lower interest rate, the monthly repayments will fall. Given that the maximum overpayment is £500, this will stop me from paying off as much as I want to every month. So I’m wondering, when I switch deals, can I reduce the term of the mortgage (say to 21 years), so that the payments stay around the same and I can still pay off a total of ~£1077/month?
So my question is, can I (and should I) reduce the term of the mortgage when my deal ends? Or am I missing something? Is there a more effective way to use the spare £500/month?
Sorry for all the info, hope it makes sense!

juststuff123

Hi Sally Cinnamon, check your policy, quite often overpayment limits are only applied to the fixed portion of the mortgage so once you switch to the SVR overpayments are limitless. If you decide to re-mortgage you could look at products that allow for better overpayments. Reducing your mortgage term would be possible but it doesn't allow for much flexibility should you need it. It's what you feel most comfortable with.

edinburgher

Yes, you can reduce the term, which will result in a higher monthly payment. We dropped from 23 to 17 years when we re-mortgaged earlier on in the year, and may look to move the remaining term back up if a possible career change goes anywhere by our next re-mortgage

Sally_Cinnamon_78

Thanks for the advice!
I will probably do the same, fix for 2 years max that way I can always extend the mortgage again later if I'm struggling.

edinburgher

I suppose there's always a bit of a gamble involved when choosing the length of a fix. Commentators are fond of pointing out that the (relatively) low mortgage rates at present are historically unusual. On the other hand, you pay an increased premium when fixing your rate for longer. I've run the numbers several times and could never justify the increased cost for 5+ years, even after considering the possibility of rate rises in the not-too-distant future.