Clarity on Martins overpayment guide

RobSwift

Hi Everyone,

I think this point needs wording better unless I'm completely missing the point. In relation to overpaying - Martin says to check:

It's also worth checking your lender won't either reduce your normal payments (meaning you're not overpaying) or reduce the term of your mortgage (effectively locking you in to the higher payments). If they'll do either of these, it might not be worth overpaying after all.

Now surely the lender has to do one or the other? If I overpay my mortgage, they either reduce the term of the mortgage, or reduce the monthly payments? Because if they affected neither, then I would pay the full amount as expected plus my overpayment!

Lets assume I have a £100,000 mortgage at 5%, and I pay £1000 monthly for 10 years. The cost is about £128,000.

If I pay an extra £200/month - then my term HAS to reduce by 28 months and I pay the same £1000 (+£200) monthly, with the total amount paid being £123,000.

OR I pay the extra £200 every month, and they reduce my base payment over 10 year term - so I still end up paying £123,000, but in smaller lumps.

Can someone clarify if my understanding is correct - in which this statement is misleading, or if the statement doesn't mean as I expect?

I'm planning to pay £600/quarter regularly to save me 3+years of payments - but need to ensure this is a type first. Last time I overpaid a lump of £2k they offered to reduce the term or reduce the monthly payment.

ZTD

It's more to do with your lender *forcing* you to change your mortgage. So in your example above, let's assume you make a one-off payment which reduces your monthly bill by £10.

If your monthly payments remain the same, you are effectively making an overpayment of £10 per month. You are right that this will pay off your mortgage quicker, due to a reduction in total interest.

HOWEVER, if your lender doesn't alter the term of your mortgage then you have the option of cutting your payments at some later date. If your lender does alter the term, then you *must* keep up these higher payments. You pay it off no quicker than if you did it voluntarily, but you lose the flexibility to choose what overpayment you want to give and when.