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

TrickyDicky101

JimmyTheWig wrote: »

My guess is that most people, especially most of those with mortgages, in the UK are paid monthly.
What you are refering to is paying weekly in advance of when you would pay monthly. This isn't possible if you are paid monthly unless yuo already have 75% of a month's mortgage payment sat around doing nothing - in which case use it to overpay and you have the same (well, better) effect.

Not going from 20yr to 12yrs as the poster suggested! It has a relatively insignificant effect.

JimmyTheWig

TrickyDicky101 wrote: »

Not going from 20yr to 12yrs as the poster suggested! It has a relatively insignificant effect.

Sorry, I know I quoted it but I didn't see that bit!
I agree it wouldn't make that much difference.
Would take it from 20 years to 19 years and 10 months.

TrickyDicky101

If only it did have that much impact - I'd make daily payments on my mortgage and have it paid off in a month

stephen6885

TrickyDicky101 wrote: »

It would save you £1.90 per month (not £3) if the provider reduced the monthly payment rather than the term.

Except, it didn't.
I'm not plucking numbers out of thin air; I made this repayment on my mortgage and the provider dropped my repayments by £3.43.
Which actually saves me £782.04 (maths was wrong on the previous example) over the remaining 19 years of monthly repayments.

Even if the numbers were closer; why is it so vital to reduce the term rather than the monthly amount--there is no clear explanation on this and Martin has written at least 1 blog and 1 news item on this and breezed over it as a consideration.

TrickyDicky101

stephen6885 wrote: »

Except, it didn't.
I'm not plucking numbers out of thin air; I made this repayment on my mortgage and the provider dropped my repayments by £3.43.
Which actually saves me £782.04 (maths was wrong on the previous example) over the remaining 19 years of monthly repayments.

.

I said it saved you £1.90 a month - I made no reference as to what the lender would reduce your payments by. These are two (potentially) different amounts - and is in your case.

What the lender has done is reduce your monthly payment by too much and hence, if everything remained the same, your mortgage term would actually be lengthened by paying off less capital each month (although, admittedly to a relatively insignificant degree).

If the bank doesn't adjust your monthly payments in response to an overpayment, then a greater proportion of each subsequent monthly payment would go to paying down the outstanding mortgage balance you owe (and the shorter the overall mortgage term).

The consequence is that over time the interest you get charged on the outstanding balance is lower than if the monthly payment had been reduced in response to the overpayment.

Hence, you pay less interest.

stephen6885

TrickyDicky101 wrote: »

I said it saved you £1.90 a month - I made no reference as to what the lender would reduce your payments by. These are two (potentially) different amounts - and is in your case.

What the lender has done is reduce your monthly payment by too much and hence, if everything remained the same, your mortgage term would actually be lengthened by paying off less capital each month (although, admittedly to a relatively insignificant degree).

If the bank doesn't adjust your monthly payments in response to an overpayment, then a greater proportion of each subsequent monthly payment would go to paying down the outstanding mortgage balance you owe (and the shorter the overall mortgage term).

The consequence is that over time the interest you get charged on the outstanding balance is lower than if the monthly payment had been reduced in response to the overpayment.

Hence, you pay less interest.

OK, According to the mortgage overpayment calculator on this site, in my exact circumstances the £356 over payment i made would save me £212 in interest and I'd repay it 2 months earlier.
But halifax reduced my monthly repayments by £3.43 and did not extend the life of the mortgage so i will pay £782.04 less over the course of the mortgage.

This is a real world example with exact numbers; it works better by reducing the monthly amount.

I'm a little confused why you think you know the numbers better than me given i'm providing the exact figures; where did your £1.90 estimate come from?

getmore4less

Bumph wrote: »

I have followed the article and the discussion and notice one glaring omission. You can drastically reduce the term of a mortgage and the total cost if you switch to weekly payments. I did this and the term dropped from 20 years to 12 years. When I did this, I was living in Canada and I wonder why this facility is not pursued/offered/considered in the UK. One of my friends to whom I told this was able to get a weekly repayment mortgage from Santander and also noticed the impact on the term and overall cost. I'd be interested to hear from anyone else who tries this in the UK.

this one of the mortgage myths.

changing the same yearly payment total to weekly has a tiny effect for many it can make things worse.


one reason it seems to work a bit is people is the monthly is divided by 4 when it should be 4.3 so they end up over paying by 8.3% every year.

on £100k over 20y @ 3% having 52 weekly payments 1/4 of a monthly reduces the term to 18y

There must have been other over payments going on to get the term down to 12 years would need a weekly payment of £190 ish.

TrickyDicky101

stephen6885 wrote: »

OK, According to the mortgage overpayment calculator on this site, in my exact circumstances the £356 over payment i made would save me £212 in interest and I'd repay it 2 months earlier.
But halifax reduced my monthly repayments by £3.43 and did not extend the life of the mortgage so i will pay £782.04 less over the course of the mortgage.

This is a real world example with exact numbers; it works better by reducing the monthly amount.

I'm a little confused why you think you know the numbers better than me given i'm providing the exact figures; where did your £1.90 estimate come from? ?

You're taking the lender's numbers as gospel which is why you are using bad figures to work out your saving.

Irrespective of whether you believe HSBC has not changed your term the impact of the lender's monthly payment reduction is to lengthen your term because at the end of what you believe your current term is, you will not have repaid your full outstanding capital balance (all other things remaining equal ie interest rates not moving in the interim).

I was calculating the saving directly in Excel - you can do the same in the mortgage calculator you are using by creating a starting mortgage of £350 over a 19 year term @ 2.34%. Monthly payments equal £1.90 (payments on an arrears basis which is consistent with most bank mortgage schedules).

JimmyTheWig

TrickyDicky101 wrote: »

If only it did have that much impact - I'd make daily payments on my mortgage and have it paid off in a month

Anything else I can do for you today, sir?
Yes, I'd like to make another payment on my mortgage?
Another one? But you've already made 6 in this phonecall...

getmore4less

stephen6885 wrote: »

I'm still really confused.
I've posted in a couple of forums and never got a clear answer.
If your monthly repayments go down, then you are still paying less. Why is it better to end paying early?

If i pay off £350 off my capital, over 19 yrs that would save me £530 at 2.34%.
If my mortgage provider reduces monthly payments by £3 over the remaining 228 months, that saves me £684.

SO CONFUSED; why is it better to reduce the capital?

the total amount you pay is determined by how much you pay and when(thats it nothing else).

The more you pay the less interest you pay.
The sooner you pay the less interest you pay
The lower the rate the less interest you pay
The smaller the amount you borrow the less interest you pay.

you can ignore the contractual term.

you save interest by paying of a lump some.
you pay a bit more interest because the payment has gone down a bit than if it had stayed the same.

You don't give your numbers so a bit of guessing and an illustration.

I can't get a reduction of over £2 with a £350 overpayment on any size mortgage. so would need more info to have a chance ow they got the number

19y @ 2.34%
Amount,monthly, Interest, term(m)
£25350 £138 £6066 228
£25000 £136 £5988 228
£25000 £138 £5872 224(4 month off the loan.)

if you reduce the payment you save £60 leave it the same £200.

how do you work out £350 capital payment saves you £530? the max it can save you 350*.0234*19= £155.61


The other thing is those £3pm you don't save them you end up paying them all back at the end because you have extra payments.