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

giger

getmore4less wrote: »

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.

Hi

Thanks for the replies re: offsets but I can't help but think they are overlooked. I used an excel spreadsheet download from this site to work out my figures. It tells me how much my term is reduced by, by simply having offset savings and keeping my savings balance intact, and also at what point my capital will equal my offset taking everything in to account (savings being consumed by mortgage). I'm fortunate that I have a reasonable lump sump in the offset savings, and that alone knocks years off my mortgage (7yrs 10mths to be precise) - and I still have my savings left intact at the end of it.

It is also COMPLETELY flexible should my circumstances change without penalty. That is why I think it is a shame they are overlooked

getmore4less

giger wrote: »

Hi

Thanks for the replies re: offsets but I can't help but think they are overlooked. I used an excel spreadsheet download from this site to work out my figures. It tells me how much my term is reduced by, by simply having offset savings and keeping my savings balance intact, and also at what point my capital will equal my offset taking everything in to account (savings being consumed by mortgage). I'm fortunate that I have a reasonable lump sump in the offset savings, and that alone knocks years off my mortgage (7yrs 10mths to be precise) - and I still have my savings left intact at the end of it.

It is also COMPLETELY flexible should my circumstances change without penalty. That is why I think it is a shame they are overlooked

Post your mortgage and offset details what you are describing is impossible with a sensible mortgage rate even with 100% offset.

edit: add example.
£100k 20y @ 4% is £606pm ,
100% offset so no interest, simple calc, no need for any fancy spreadsheets.
£100k/(12*13) = £641pm to pay off the debt in 13years.

Impossible to knock 7 years off even 100% offset.

dowright

Noticed the article on mortgage overpayments and found it interesting, however I found that one situation has not been mentioned and people should be aware of.

At present I have a mortgage and some time ago (before the crash) I was happy to make overpayments, usually most months. This eventually resulted in £11k of overpayments. Then I realised this was having no effect on the mortgage; no change in term, regular payments or interest. I didn’t take it up with the bank, but withdraw the money and started a stocks/share ISA. This also had zero effect on the mortgage, so for about 2 years, I was wasting my cash.
What was happening, the overpayments where effectively in a 0% interest saving account, just waiting to reach my mortgage balance, ending the mortgage earlier with the obvious savings.

Disgruntled_of_Stroud

I used to increase my monthly payment( when my mortgage was with Alliance and Leicester when I was flush. I recently called Santander, who unfortunately are now my mortgagees due to their takeover of A&A, and asked if I could again increase my monthly payment. They said no, I would have to go into a branch and make the payment as they 'couldn't change direct debits'. I wondered if they couldn't afford a keyboard to make the changes, I have an old one they could borrow.....

BoxerfanUK

When my fixed rate with the Leeds B/S came to an end early last year I remortgaged with Tesco bank on a 3 yr fix as they allow 20% overpayments.


I substantially overpay every month via DD and when I set it up I asked them to reduce the monthly repayment rather than the term because it suits me better.


For one thing it means if ever I had a sudden loss of income/job, my monthly repayments are lower so I could weather the storm for longer, but also as the DD (including overpayment) remains the same it means that whilst my standard monthly payment reduces, my monthly overpayment automatically INCREASES.


In March 2014 my DD of £1380.00 was made up of £606.51 standard monthly payment and monthly overpayment was, therefore, £773.49. By Feb 2015 my standard payment was £516.24 and my overpayment £863.96, so each month the former figure goes down and the latter figure goes up.


I can still phone them and overpay more if I like, for example, I just phoned them and paid an additional £344 due to no council tax going out in Feb/March.


I don't know how much more interest (if any) I'm paying over the term (12 years) but it seems to suit me better as it gives me more control. I may be wrong, but I think that both ways, reducing the term or the payment has a very similar effect and although the term is unchanged the amount I owe I can see massively decreasing.


Edit; Just to add, although a 12 year term, mortgage will be paid off in 4 y 6 months from the start date.


Just have to keep an eye out midway through yr 3 as that's when I will hit the 20% limit so as to avoid redemption penalties. At that point I'll change the DD to the standard amount for 6 months and save the OP's and pay it as a lump sum at the end of the fixed rate period, thus being free of redemption charges.


Overall, quite pleased with Tesco bank mortgages.

kedi7uk

I understand the benefit of overpaying or reducing the term of a mortgage but with so many shared ownership properties out there now I have another but related question.

If you have a lump sum is it better to reduce the mortgage or to buy another share?
What calculations do you need to do to know which is better?
Thanks

getmore4less

kedi7uk wrote: »

I understand the benefit of overpaying or reducing the term of a mortgage but with so many shared ownership properties out there now I have another but related question.

If you have a lump sum is it better to reduce the mortgage or to buy another share?
What calculations do you need to do to know which is better?
Thanks

The key ones for each share will be.

How is the share calculated.
What are the costs of purchasing a share.
What happens to any rent.
Any other T&C change, like who you can sell to.

IF it costs money to buy a share then you may want to consider fewer purchases.
if the values is based on current and it is going up buying sooner may be better.

frazell

Disgruntled_of_Stroud wrote: »

I recently called Santander, who unfortunately are now my mortgagees due to their takeover of A&A, and asked if I could again increase my monthly payment. They said no, I would have to go into a branch and make the payment as they 'couldn't change direct debits'. I wondered if they couldn't afford a keyboard to make the changes, I have an old one they could borrow.....

I had this same thing with Santander when I recently set up some overpayments. I called them and asked to make overpayments and the operator asked if I wanted to increase the monthly direct debit. Thinking that was the easiest thing to do I replied yes, only to be told that it would be a change to my mortgage product and I had to go in branch to speak about the consequences (including early redemption fees!!).


A few seconds of standoff ensued at which point I said, "can I not just set up a standing order instead then?". Penny dropped, and she sent out the forms to advise how the payments were to be processed, e.g.. capital or interest, fixed or reducing term.


I made my second overpayment this month on the 20th and as of today its still not been processed, despite already calling them. This makes me very angry as interest is calculated daily and therefore each day they are fiddling around I'm losing the benefit of the overpayment on the interest. In fact, I'm going to write and complain right now!


Call them again and ask to overpay by SO.

frazell

In case anyone else was interested, I just called and checked about the interest and informed by Santander that they back date the interest to the overpayment date.

JimmyTheWig

That's what I hoped they would do, but thanks for the update.