Mortgage term

ozdemirozgur

My mortgage is ending in 3 months. I have 28 years remained but would like to reduce it to 25 years as I can still afford. The question is, should I just overpay month by month basis and keep the 28 years, or reduce it to 25 years.


If no difference between those two options, the best seems to be the option 1 as it will be my decision to pay or not by keeping the mortgage amount low. How I can justify the difference?

jimjames

I don't understand.

Is your mortgage ending in 3 months or 28 years?

What happens in 3 months?

quantic

I think they mean that their initial deal ends in 3 months, so that they can remortgage soon for a different deal. I had this debate with myself a while ago, I find its best to reduce to a term you can afford comfortably as its much more likely you will keep up with regular over payments this way.

Reaper

A better forum to ask on is Mortgages & Endowments

I'm a bit confused by your post too, but if you are taking out a new mortgage which you plan to overpay then make sure they allow overpayments first. There might be penalties for over paying on a fixed rate mortgage for example.

bowlhead99

I assume what you mean is that your current mortgage deal, which was for some fixed terms, expires in 3 months and you can change it without penalty at that point? And you're wondering whether on whatever new deal you sign up to, should be on the basis of paying off the whole original mortgage (or maybe the remaining mortgage) in 28 years or go for 25 instead.

Personally, I'm officially on a 28year basis but choosing to voluntarily overpay a bit, so my standing order brings the total payment up to a nice round number that would clear it in about 23 or 24 or 25 years (can't quite remember where the maths came out).

This is a safer solution because if you run into difficulties, the minimum that they demand you pay each month is calculated on a 28 year basis - so, you can just stop voluntarily paying more if you have other needs for the cash, or other investment opportunities. And depending on the lender, if you ask for permission they may allow you to 'take back' the overpayments by paying a lower rate in future months until your overpayments have been used up.

So, even if you think you'd like to pay off at a 25-year pace, setting the rate to 28-years and then making overpayments is probably a simple and safe solution.

The only thing to consider, in setting it to pay at a lower rate, is whether you might eventually want to make bigger overpayments during any fixed term of your mortgage that you sign up to. For example, perhaps you get a pay rise and decide you would like to aim to pay off even faster, like a 20 year term.

e.g. you might be paying £500pm on a 25 year £100k mortgage but to pay it in 20 years requires £575. The extra £75 is a 15% overpayment, and might be allowed. But if you had set the standard term to be 28 years, perhaps your monthly normal payment was only £465. Then if you suddenly wanted to start paying it off at the pace of a 20 year mortgage, the increase would be over £100pm and over 20%. That level of overpayment might not be allowed without a penalty. I use Nationwide who allow me a flat £500pm extra, and I'm not using all of it, but I know some set their penalty levels using a percentage base.

ozdemirozgur

sorry, my current deal is ending in 3 months, but the mortgage itself has another 28 years to go.


when I had bough my house 2 years ago, I was on 85% LTV due to my low deposit, but now on 70% LTV due to increase in house values. So, I can still afford to have a new deal based on 25 year reducing the total term to 3 more years. I am sure I can also afford it. But the question here, does it make sense? or what will be the actual money values I will get out of it. There are some posts on various places on the web, suggesting that do not reduce your term but keep overpaying on monthly basis which will have the same impact. I need to find out a way of calculating both options, and understand the benefit in terms of GBP.

bowlhead99

The easiest thing to do in that case is to just go to your provider's website and plug the details in - play around it to see what payments are for different lengths of terms.

Basically mortgage companies will calculate the interest based on what's left at the end of each day or month. They will take an automatic amount from you based on whatever fixed equal monthly payment amount will get you to zero in 28 years or 25 years or whatever you asked for. If you want to pay off a bit more, you can. Then the next time they calculate interest, they will look at how much is actually outstanding. Whether you made some of that payment voluntarily or they took it as the standard monthly amount, the remaining balance of your principal has reduced by the same amount and so the next days's/month's interest charge is the same in both cases.

Let's say the amount on a 100k mortgage was looking like £465 to clear it in 28 years, but if you requested a 25 year mortgage they would put you on £500 a month. If you go on the £465pm plan and always give them £35 on the same day of the month as you pay the official £465pm, you are giving them £500 a month and it will only take 25 years until the debt is cleared.

Imagine you owe me money and every month I charge you interest which starts off at £50pm. You give me £100 each month so it clears the interest and £50 of the actual debt itself. By month 2, the debt is not so big and so the interest charge might only be £49 that month, and when you continue to give me £100, it now clears the £49 of interest and also £51 of principal. Next month the £100 pays £48 of interest and even more principal.

So, how much you pay me directly affects how fast the loan gets cleared. If you paid me less than £50pm at the start, it wouldn't ever get cleared as the interest would be racking up. If you paid me £200 the principal would go down much faster leading to the interest charges reducing faster and the whole thing gets cleared quicker.

So in your situation, simply go to your mortgage company's website and play around with the figures at a 70% LTV mortgage level. Run the numbers for a 28 year mortgage and a 27 year one and a 20 year one etc etc. That will show you how much money you need to give them each month to clear the mortgage in that time frame. If it says £500pm will clear it in 25 years, then you can pay at the 28-year rate of £465 plus manual overpayment of £35, or the 27 year rate of £475 plus manual overpayment of £25, but as long as you manually top it up to £500pm it will be gone in 25 years.

Two more things.

1) At the end of whatever deal you take now, interest rates might rise. If you are committed to paying the thing off in 25 years, from the bank's point of view, and the rates go up, you can't necessarily say you want to change it back to a 28 year slow-pay deal. They would have to reassess that risk. But if you had set the terms at 28 years in the first place, they have to let you keep it unless you actually default on the minimum payments. So, the cautious 28 year approach is probably safer.

2) You say you have a better LTV because of increase in house values. However if you're not changing house (i.e. you haven't just gone and bought the house at the new high value to demonstrate to a mortgage company that somebody is really willing to pay that much for it), your existing mortgage company might not be willing to just accept the new valuation. Otherwise people would just claim a new higher value every week even without spending anything on the house. You may need to change mortgage companies to force someone to do a full assessment of the surveyed value of the house and risk of lending that amount of money to you at that headline interest rate price that you like.

Waldorf_Statler

It is quite simple really:

The interest payment for your mortgage is the same, regardless of the term of the mortgage.

Imagine an interest only mortgage; you only pay off the interest on the loan. So you could hold that loan for 5, 10, 500 years - it doesn't matter if you are only repaying the interest. If the interest % remains the same then the cost of repaying that interest on a monthly basis remains the same.

Now, to repay that loan requires payment over and above the interest amount. A term of 28 years will take longer than 25 years but at a lower monthly amount, over a greater number of months.

As others have described, you could make an over-payment on a 28 year term to the effect of you paying off the loan within 25 years.

Same same.

A mortgage calculator (bbc website has a simple one) would be able to give you an actual example using your loan amount and interest rate.

If you trust in your diligence to make a regular monthly saving, and not to be seduced by the sirens that are advertising and marketing gurus, then keep the term as long as you can. Just make sure your lender permits over-payment to the amount that you wish to over-pay.

JimmyTheWig

ozdemirozgur wrote: »

I need to find out a way of calculating both options, and understand the benefit in terms of GBP.

There's nothing to calculate.
If you pay the difference between a 25 year repayment and a 28 year repayment at the same time each month as your monthly repayment then the two will be exactly the same. The difference will be 0 GBP.

The advantage of officially reducing your term is that the money you repay each month will be set in stone. You can't pay less just because you feel like it that month, so you will clear your mortgage in 25 years regardless of willpower.

The advantage of leaving the term at 28 years is that the money you repay each month won't be set in stone. That means that if you desperately need the money for something else that otherwise you would have borrowed (and paid high interest) for then you can use the "spare" mortgage money and make a double overpayment next month.

Which of those suits you best isn't a mathematical calculation. It's about you and your personal circumstances.

ozdemirozgur

Thanks for al reply, but just one more question. I am recently rejected by a mortgage company, and they di not tell me why ? Is this a common practice? they said they cannot validate the information. Can this impact my future ability to find a mortgage from other lenders?