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MSE News: 'Decrease the term or overpay my mortgage?' – Martin Lewis answers

Overpaying and shortening a mortgage term do the same thing, yet overpaying has the advantage that you can stop it...
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'Decrease the term or overpay my mortgage?' – Martin Lewis answers

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  • magpiecottage
    magpiecottage Posts: 9,241 Forumite
    1,000 Posts Combo Breaker
    Always remember you do not "borrow" money in the sense that you might "borrow" a mate's bike.

    You do not pay your mate to use his bike (except perhaps to buy him a pint).

    On the other hand, if you hire a car you have to pay money for all the time you have it. If it is sitting around doing nothing then you are paying the owner for the privelege of having it sitting around doing nothing. So you would normally give it back if you did not need it.

    Our local Scout Group hires a lorry to take its kit to camp. It is cheaper to pay to drive it all the way back home then hire it again the following weekend than to leave it sitting around doing nothing all week.

    Money works like that. You are really hiring it - so if it is sitting around doing nothing it is probably better to give it back - although you need to weigh up whether the cost of paying it back early and/or getting it back again if you need it later - makes it worthwhile.
  • VT82
    VT82 Posts: 1,081 Forumite
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    Nice article. Covers the question from every angle for most people.

    I do wish the bit about inflation was left out though. Inflation has the same effect on every 'do I overpay or not?' scenario, so it adds nothing to bring it up, and will only confuse or worry people who might otherwise have got it.
  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
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    Not quite sure how this is news when it was on Martin's blog 6 months ago?
    http://blog.moneysavingexpert.com/2014/10/09/dont-shorten-your-mortgage-term-if-you-can-overpay/
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
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    VT82 wrote: »

    I do wish the bit about inflation was left out though. Inflation has the same effect on every 'do I overpay or not?' scenario, so it adds nothing to bring it up, and will only confuse or worry people who might otherwise have got it.

    With many people on static or falling levels of income. Erosion of debt by wage inflation certainly isn't what it is.
  • Another flexibility advantage for overpaying to reduce monthly payments is that if you can't keep up the overpayments, your monthly payment is now lower i.e more affordable.
  • Pincher
    Pincher Posts: 6,552 Forumite
    1,000 Posts Combo Breaker
    Ideally, you want to have an offset mortgage, so you can use the money in the offset account if you need to, without paying arrangement fees again.


    It certainly makes sense to offset a 4.5% mortgage, if all you can get is 1.5% interest.
  • getmore4less
    getmore4less Posts: 46,882 Forumite
    Part of the Furniture 10,000 Posts Name Dropper I've helped Parliament
    If your mortgage provider alters your repayments to keep the term the same, although it will boost your monthly disposable income, you won't save on your interest paymentsand the lender will earn more, . So be sure to tell it to keep your monthly repayments fixed


    Woops,

    incorrect.
  • jamesd
    jamesd Posts: 26,103 Forumite
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    edited 16 March 2015 at 5:00PM
    VT82 wrote: »
    Inflation has the same effect on every 'do I overpay or not?' scenario, so it adds nothing to bring it up, and will only confuse or worry people who might otherwise have got it.
    Inflation doesn't have the same effect on every overpay or not scenario.

    Easy cases first are those with plenty of spare money. In this case the inflation effect is quite similar for the overpay, save or invest cases.

    But that's not the whole picture. Overpaying usually does involve a sacrifice of some sort. That could be anything from stopping a TV subscription or having less new clothes for the children to a cheaper hotel room on holiday. For any household budget, the effect of delaying overpaying will be to make the sacrifices involved in overpaying lower.

    In some of the worst possible cases, overpaying is at the expense of lower or no pension contributions and the cost is more working time or far larger contributions later to try to make up for the lost compound growth above the mortgage interest rate for the years of overpaying.

    Knowing that pay typically rises at 1% over inflation, ignoring promotions, say we have a situation where overpaying means stopping a £600 a year subscription, the pay is net £15,000 a year, the mortgage payment is £5000 a year and inflation is 2%. After five years the pay has increased to £17,389 (at 3%), the mortgage is still the same £5,000 a year and the non-mortgage £10,000 spending has increased by 2% a year to £11,040. There's now £17,389 - £11,040 - £5,000 = £1,349 available to use for mortgage overpayments, spending, saving or investing.

    Instead of having a choice to cut the subscription to save the £600 to overpay the mortgage borrower now has substantial free income to allow them to do it with much reduced hardship or compromise potential.

    This is also why it tend to be good advice to people struggling with a mortgage to just stick with it, knowing that in time the usual workings of inflation and pay changes will make a hard situation tolerable then OK and finally easy.

    Similar reasoning also explains why interest only mortgages are the ideal product for first-time buyers, since they pay less each month at the time when it is most difficult to pay and can gradually move to repayment as more money becomes available. That increase could be a gradual ramp-up with affordabilty-based get-outs so that they don't stay on interest-only for the whole term unless they have a repayment strategy. Gradual and get-outs are needed because a sudden large increase substantially increases repossession risk, as happened in the US where products that were interest only for five years then switched to repayment with no options were sold.
  • magpiecottage
    magpiecottage Posts: 9,241 Forumite
    1,000 Posts Combo Breaker
    Thrugelmir wrote: »
    Erosion of debt by wage inflation certainly isn't what it is.

    It may not be what it WAS, Thrugelmir, but it most certainly is what it is!
  • funcomp40
    funcomp40 Posts: 13 Forumite
    I wanted to share my story with you, I am a single parent and bought my first home in 2001 it was a small bungalow, with only having one wage comming in and being very worried about such a large debt. I stumbled accross your site and kept hearing the message about getting rid of debt is far betting than saving. After two years my deal with the Halifax was up and I took a big decision against all my families advice and got a flexible mortgage with the one account. In 2013 I had fully paid off my £80,000 mortgage I am over the moon. I paid my wages into the account and took great delight every month to see the balance drop, My grandparents unfortunately passed away and the few thousand pound they left me was paid straight into the mortgage account. In fact I have kept the account open so that I have some cash if I need it at a low interest rate which i can pay off when I like.

    Flexible Mortgages are not for everyone, but I think for me it has made a mega difference. I have not been on holiday for over 8 years however I have just started to do up the house and paid cash for a new kitchen which I fitted myself last year, onwards and upwards, now to start saving. thanks again MSE. :beer:

    Ps I am new to posting but use your site every week.
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