'Don't shorten your mortgage term if you can overpay' blog discussion

Former_MSE_Paloma

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "Don’t shorten your mortgage term if you can overpay" Blog.

Please click 'post reply' to discuss below.

womble12345

That is interesting.

When i overpay i get the option that the repayment goes to either reduce the term or reduce the monthly payment, which should i chose?

JPS

Exactly what I try and explain to people. Very well said. Overpaying your mortgage is such a powerful and beneficial thing to do if you can. Even an extra £50 a month can save you years of paying a mortgage. Wish more people knew about it and understood it. Obviously the banks don't want you to do it as it loses them a hell of a lot of money..... Keep the term the same and overpay for maximum flexibility.

womble12345 wrote: »

That is interesting.

When i overpay i get the option that the repayment goes to either reduce the term or reduce the monthly payment, which should i chose?

That's a little weird. The whole point of overpaying is to reduce the term. Why would you overpay only to make your monthly payment equal out to what it would have been anyway? Get that term reduced to save you paying those mortgage payments down the line!

womble12345

My mortgage provide is nationwide and the default behaviour of an overpayment is to reduce the monthly payment, i will get it changed.

JPS

womble12345 wrote: »

My mortgage provide is nationwide and the default behaviour of an overpayment is to reduce the monthly payment, i will get it changed.

I guess you are always offered to do either but it certainly makes sense to reduce the term if you can comfortably afford the overpayments

JimmyTheWig

JPS wrote: »

That's a little weird. The whole point of overpaying is to reduce the term. Why would you overpay only to make your monthly payment equal out to what it would have been anyway? Get that term reduced to save you paying those mortgage payments down the line!

On the logic of Martin's blog, womble12345 should do the exact opposite of this quoted suggestion.

JimmyTheWig

A 25 year 3% interest repayment mortgage on £200,000
Monthly cost: £948 | Annual cost £11,380 | Total interest over 25 years: £84,530

Shorten that to 20 years
Monthly cost: £1,109 | Annual cost £13,310 | Total interest over 20 years: £66,210

The problem with not shortening the term is one of willpower.

In Martin's example an overpayment of £160 a month would (almost) have the same effect, I agree. But you have to make the overpayment yourself.
So yes, I make my overpayment in October.
And again in November.
In December I could do with a bit extra to buy a few pointless things that I wouldn't buy if the money wasn't sitting there and it wouldn't particularly bother me if I didn't have them. So I won't make the overpayment "just this once".
In January I've got Christmas' credit card statement. Pretty hefty. Rather than cut back on junk elsewhere I'll use that spare £160 to help pay the credit card bill.
February, March, April, May make the overpayment as planned.
When I book my summer holiday in June I use that spare £160 to book a couple of pointless extras.
In July I use the money for school summer holiday activities, even though we could have had just as much fun doing free stuff.
Obviously I won't make the overpayment in August due to the holiday I booked earlier in the year.
September I make the overpayment as planned.

So that's the year done and I've only made 7 of 12 overpayments. And the money hasn't really got me anything of benefit. If I'd reduced my term then I wouldn't have missed that money.

So I think it's about finding the right balance, which is a personal thing.

womble12345

JimmyTheWig wrote: »

On the logic of Martin's blog, womble12345 should do the exact opposite of this quoted suggestion.

Would you mind explaining the reasoning behind that statement?

JimmyTheWig

womble12345 wrote: »

Would you mind explaining the reasoning behind that statement?

basically, the more you pay off your mortgage (and the sooner you pay it off, but that's not really a question for now) the more interest you'll save.
When you make an overpayment if you reduce your term then your monthly payments will be higher than if you reduce your monthly payments.
With higher monthly payments you're paying more off your mortgage, which saves more money, which is why JPS says reduce your term.

But if by keeping the term the same, your monthly payments go down by £10 and so you put that £10 a month into your overpayments pot and overpay it on your mortgage then you're still paying the same off your mortgage as you would have done if you reduced your term.
So it doesn't matter either way.

So with these figures, in your case you have the option of reducing your monthly payment by £10 a month.

Now, lets say your hours get cut at work, or interest rates on your mortgage go up, or any number of things that could make it harder for you to pay the mortgage from month to month.
Martin's point is that if you reduce your term, thus keeping your monthly repayments high, you have to make those repayments even if you are struggling. Whereas if you had reduced your monthly repayment then that's £10 a month that you don't have to find if you can't.

The flip side is, as I explained above, that you wouldn't always put that £10 a month into your overpayment pot and that you'd waste it instead.
So up to you at the end of the day.

womble12345

Thanks for your explanation. Nationwide allow me a maximum overpayment of £500 per month and i am already at that limit each month and seeing as the " reducing monthly payment option " relies on me increasing my overpayment by the amount that my monthly payment reduces each month then it does seem like i will be better off reducing my term if i feel i could always afford my existing monthly payment.
Thanks for clarifying that for me.

Mobeer

JimmyTheWig wrote: »

On the logic of Martin's blog, womble12345 should do the exact opposite of this quoted suggestion.

The person Martin refers to has a very flexible mortgage. My previous mortgage provider was more like that mentioned by womble12345. An extra payment either:
1) reduced the monthly payment, such that the mortgage was paid off at the original planned date
2) reduced the mortgage term, such that the mortgage payment remained unchanged

There was no concept of the more flexible idea of keeping the term unchanged, keeping the monthly payment unchanged but paying off more than that monthly payment.