Basic question re: overpaying

mrobbo

Hi,

I watched Martin's programme on ITV last week and he covered mortgage overpayments. Since then, I've had a nagging question which is as follows:

I understand that overpaying on your mortgage is a very good thing. I also understand that when you overpay, you can either;

1) see your monthly payment reduced, but month of final mortgage payment remains the same,
or
2) see your monthy payment remain the same, but month of final mortgage payment is brought forward

I understand that option 2) is desirable. You are mortgage-free more quickly, therefore you'll be paying less interest overall.

Here's the rub. Most people take out a mortgage for 3, 4, 5 years before moving it elsewhere. So, if overpaying within this time, does it really matter if you opt for 1) or 2)? After all, you'll be moving on to another mortgage lender after the cheap rate has elapsed anyway. Moreover, if you're overpaying £100 pm, as I am, that is £100 off the capital regardless of 1) or 2).

What are your thoughts on this? Hope I have explained this ok!

JimmyTheWig

It doesn't make a huge difference, but the idea is there that 2 saves you the most interest.
With an overpayment of £100, option 1 may see your monthly repayment reduced by 50p.
So you could see option 2 as making further overpayments of 50p each month.

Overpayments are good, so that's good.

What you could do, however, is save up the 50p each month and after a year make a £6 overpayment. Which would be pretty similar.
But the sooner you make an overpayment the sooner you start saving interest. So better to have the money come out each month than pay it at the end.


Note that there is another school of thought that says flexibility is beneficial. People following that track would go for option 1, saving up the money to make an overpayment when they choose to. They don't save as much interest as those doing option 2 but they have the flexibility.


In terms of moving mortgage provider after a few years, that doesn't really come into it.
When you move your mortgage you get the option of how long you want the new term to be. You can start again at 25 years, make the new term match what your original term would have been, make the new term match your current term having made overpayments or anything else you choose.
What matters is the balance of the mortgage you are transfering. The more you have paid off the smaller that will be.

mrobbo

Jimmy, thanks for the great response. Yeah, I'm planning on increasing overpayments as monthly payments decrease, the hope being that this process will pick up speed. I'm due to remortage in a couple of years, and I'm hoping I can get under the 80% LTV mark by then. Overpaying is rather satisfying! Thanks again.

themull1

I make overpayments and keep the direct debits the same and the length of mortgage the same.

Greenst

Have a play with the mortgage calculator on here that will give you a good idea of how it all works how much interest you'll save and where you'll be at 3, 4 or 5 years
They really helped me but be warned they can make you a bit obsessive about it !!!!
Good luck it's well worth doing.