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

JimmyTheWig

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.

Either something else has changed or the lender has made a mistake - which will come out in the wash at some point.

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.

There are pros and cons. Martin's point is that with a totally flexible mortgage then in many ways you are better off _not_ reducing the term.

But the advantage of reducing the term is that it keeps repayments high which reduce your balance sooner.
E.g. in your case if your repayments hadn't have gone down by £3.43 then after one month your mortgage balance would have been £3.43 less. Doesn't make a great deal of difference as you've got an extra £3.43 in your bank account. But then the mortgage company add interest to your mortgage based on your daily balance. So your mortgage interest will be less because your balance is £3.43 less.
Obviously at these levels we're talking peanuts.

getmore4less

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.

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.

Post your real numbers, per and post overpayment there is something not right, you may have had some overpayment(they do happen because of the way mortgage are calculated feb in particular)

Any other recent changes like the rate.


it does not matter which you do, but if you reduce the payment and don't top up you WILL pay more than if you did not top up.

The main advanatge of keeping the term is it reduces the contractual payment.

stephen6885

OK, here are the numbers

Remaining full term: 19 years 1 month
Interest rate on: 18 Mar 2015 2.34%
Current balance: £90,669.16
Current monthly payment: £492.74
Minimum monthly payment: £492.74

This shows how the repayments reduced after an overpayment.

01 Jul 14 Direct Debit £492.74 Remaining £93,180.09
30 Jun 14 Interest £179.71 Remaining £93,672.83
17 Jun 14 Capital Repayment £356.28 Remaining £93,493.12
17 Jun 14 Receipt £1.10 Remaining £93,849.40
02 Jun 14 Direct Debit £496.17 Remaining £93,850.50

with 19yrs left to pay and the repayments going down, it saves more than the £212 the mortgage overpayment calculator suggests I would save if my repayments stayed the same.

If more numbers are needed let me know; but it would be great if one of Martin's blogs dealt with this in depth rather than breezing over it.

getmore4less

stephen6885 wrote: »

OK, here are the numbers

Remaining full term: 19 years 1 month
Interest rate on: 18 Mar 2015 2.34%
Current balance: £90,669.16
Current monthly payment: £492.74
Minimum monthly payment: £492.74

This shows how the repayments reduced after an overpayment.

01 Jul 14 Direct Debit £492.74 Remaining £93,180.09
30 Jun 14 Interest £179.71 Remaining £93,672.83
17 Jun 14 Capital Repayment £356.28 Remaining £93,493.12
17 Jun 14 Receipt £1.10 Remaining £93,849.40
02 Jun 14 Direct Debit £496.17 Remaining £93,850.50

with 19yrs left to pay and the repayments going down, it saves more than the £212 the mortgage overpayment calculator suggests I would save if my repayments stayed the same.

You can't just tot up the reduced payment and call that a saving it does not exist.

If more numbers are needed let me know; but it would be great if one of Martin's blogs dealt with this in depth rather than breezing over it.

Based on the 2nd June data the term was till March 2034(£165 last payment)
Based on the 1 July data the term was till March 2034 no reduced payment
Still on target based on todays data.

you has some overpayment hanging round that reduced the payment by more than amount atribituable to the payment 17 june 2014.

G6JPG

stephen6885 wrote: »

[]Even if the numbers were closer; why is it so vital to reduce the term rather than the monthly amount[]

Because interest is compound.

Assuming this is as the result of paying in a lump sum:

If you keep the same monthly amount, the term will reduce. So you'll have fewer months during which you're incurring interest on interest.

If you keep the term the same but reduce the monthly amount, you'll still be incurring interest on interest for the same number of months.

Take it to extremes: say you were lucky enough to be able to pay off all but a couple of months' worth (at your present monthly amounts) of your mortgage. If you kept the monthly amounts the same, you'd pay it off in just over the two months, allowing for the interest incurred on the amount owed, mostly during the first month. If you kept the term the same, reducing the payments to a negligible amount assuming you have many years left to pay, then you'd pay an awful lot of interest.

It's always better to reduce the term than the payments, because of compound interest (interest on interest). Unless you can make the savings in the payments get you a higher rate of interest than you're paying on the mortgage - which of course you can't!

giger

giger wrote: »

... I am surprised that offset mortgages are not more popular....

Or do this; my offset savings will knock 7 years of my mortgage term if I leave them in place, my overpayments knocking a similar amount off. I remortgaged last year on a 20 year term and it currently looks like it will be paid off in 6 years.

Very surprised the MSE collective aren't all over this, if not just for the flexibility let alone to be mortgage free!

getmore4less

Offset mortgages are not magic they don't save money because they are offsets, they save money because you borrow less.

getmore4less

G6JPG wrote: »

Because interest is compound.

Assuming this is as the result of paying in a lump sum:

If you keep the same monthly amount, the term will reduce. So you'll have fewer months during which you're incurring interest on interest.

If you keep the term the same but reduce the monthly amount, you'll still be incurring interest on interest for the same number of months.

Take it to extremes: say you were lucky enough to be able to pay off all but a couple of months' worth (at your present monthly amounts) of your mortgage. If you kept the monthly amounts the same, you'd pay it off in just over the two months, allowing for the interest incurred on the amount owed, mostly during the first month. If you kept the term the same, reducing the payments to a negligible amount assuming you have many years left to pay, then you'd pay an awful lot of interest.

It's always better to reduce the term than the payments, because of compound interest (interest on interest). Unless you can make the savings in the payments get you a higher rate of interest than you're paying on the mortgage - which of course you can't!

It is better to keep the term reduce the payment and overpay.

getmore4less

The problem with some offset calculators they forget to tell you your saving are gone to shorten the term.

The max saving on a mortgage is 100% offset and to reduce the term from 20 to 13 requires a rate over 4.65%

on a 2.5% rate
100% offset save 4y 3m.
50% offset save 3y 3m.
25% offset save 1y 9m.

markthesparky

Love reading through this thread. I am lucky enough to be able to overpay and invest through an ISA. My mortgage is with the nationwide, who allow me to overpay a maximum of £500 per month, which I do on th first of every month. This has reduced the term greatly. I get a nice letter every time telling me the term end date.
I have hedged my bets, as martin said the debt is there until paid, but the methods we use to repay this debt is down to the individual. With this in mind a decided to invest using the ISA. In three years I have seen double figure returns every year on my investment. I am now at a stage where is is worth exactly 25% of my original mortgage amount. However as I have also reduced the mortgage amount the investment is currently about 29% of the amount left on the mortgage.
As I said I am very lucky to be able to afford to do this, but my point is do not just look at the debt and focus on that, look at ththe bigger picture. I know there is a risk with the ISA, that is why I continent to make the overpayments.