Overpayment Thoughts

osaddict

Guys,

I've just had a meeting with a broker and he's confused me. I was under the impression that:

1. Going for a 35 year term instead of a 25 year term (everything else is the same) and paying off the equivalent of the 25 year term each month via over payment would mean that the 25 and 35 are equivalent except you have the flexibility to reduce to the 35 year rate if you fell on hard times?

My broker semeed to be saying that you'd still pay more doing 35 years compared to 25 years even if you overpaid to match the 25 year amount.

This seemed to be contrary to my understanding.

I'm wondering if someone can clarify, perhaps with an example?

stator

It would depend on how the mortgage company calculate interest on overpayments. There may be a delay in taking them off the balance. The T&Cs of the mortgage would say

osaddict

If it was the day after the payment, as the Santander/Abby one I am looking at states?

amnblog

Your understanding seems correct.


On most cases the regular overpayment keeping you on track to repay within 25 years should have minimal difference in cost from a 25 year term at outset.


You should also note that the Broker may be suggesting a longer term contract as you do not meet affordability with the proposed lender on a 25 year term.

osaddict

The broker was actually suggesting a shorter term! It was me who was suggesting 35 years!

My Mum raised a question though - what if you pay the 35 year one off earlier - is there an 'early repayment penalty' - not something I have to think about right now as I'll chop and change a few times before then I guess, but it was an interesting point.

stator

Usually the early repayment charge only applies to the fixed rate period, not the mortgage term. There is sometimes a completion fee when you pay off the mortgage, but it's usually only a couple hundred.

Thrugelmir

Extending over a longer term may be attractive in terms of monthly outgoing. However the downside is the amount of interest you'll pay. So is worth comparing. A fixed repayment is also a good discipline to have. With variable overpayments far too easy to not to overpay. As something else will account for your money.

osaddict

I think I'd certainly have to be disciplined and make sure I put a reminder in my phone or something so that I actually did it.

Yorkie1

If you know you'll always be able to afford a certain level of o/p's, then set up a standing order. You can then diarise to pay more manually if you want.

Thrugelmir

osaddict wrote: »

I think I'd certainly have to be disciplined and make sure I put a reminder in my phone or something so that I actually did it.

Doesn't mean that you actually will.

georgehere

Before you commit, think carefuly about your objectives.

'Flexibility' over a 35 year timeframe is possibly deceptive - who knows what will happen in 25 years time?

What is the flexibility for?

Try to be clear about the potential problem you are trying to address. For example if you feel you could need money for another investment, then would an interest only mortgage which allows overpayments be more suitable?

There's lots of possibilities and options!