Overpaying mortgage - reduce term or monthly payment?

MrsCorlett

Hi all,

This thread has been discussed previously however didn't quite answer the question I have.

I am planning to start making capital repayments on my mortgage. As I understand it there are two options following on from that:

1. Reduce your monthly payments; or
2. Reduce the mortgage term.

The advice appears to be usually to choose to reduce the mortgage term, which I can understand.

However what I was thinking about doing was reducing the monthly payments BUT using whatever I then save from those monthly payments to add to my overpayments. E.g. if I save £10 a month, I would then add that £10 a month to my overpayment, and each time I make an overpayment and the monthly payment reduces, I keep adding to my overpayment amount, therefore increasing the amount of my overpayment over time. Obviously it's not going to be a huge amount of reduction but every little extra helps!

I am currently at the start of a 5 year fixed term so reducing the term isn't going to make much difference to me for the next 5 years. My plan was then to reduce the term when I re-mortgage once the 5 year fixed term was up, since my mortgage balance would have reduced enough by then due to the overpayments I have been making.

I was just interested in whether others thought this would be viable - all the posts I have seen so far about this have just referenced reducing payments, but not using that reduction to add to and therefore increase future overpayments.

Any opinions gratefully received!

Thrugelmir

There's no need to reduce the term. Doing so will result in a contractual change. Which by default will force the lender to assess affordability etc. Sounds daft I know, but is a necessity to comply with regulatory requirements.

Maintaining your current payments will reduce the term naturally. This actually allows some flexibility in the future should you wish to reduce your repayments.

getmore4less

Many lenders don't do a formal contractual change with reduce term so no checks

What they are basicaly giving is the option to keep the payment at the higher level which will reduce the term as it is the payments that determine the real term.

Some will recalculate the payment at some future event like an interest rate change or if you ask them or annualy

Some even give the option to keep a higher payment pemanent so it only goes up and never down.

edit : forgot as long as within OP limits, reduce the payment and adjust the overpayment.

alderpoint

Always always always overpay if you can afford to. Indeed, overpay even if this means denying yourself some luxuries. This way your debt reduces faster and you have the option of paying less in the future.

However, do be aware of how often your lender calculates the interest due: it used to be the case that some only did this annually whereas others did it daily - obviously overpaying on those who recalculate more often is more beneficial.

MrsCorlett

Hi all and thanks very much for your replies.


I was interested to see though what the views were on those two options lenders tend to give you when you overpay - i.e. use your overpayment to reduce the term, or use your overpayment to reduce monthly payments.


The usual advice is to opt to reduce the term (as if you reduce your payments you're not going to pay the mortgage back any quicker). However does that advice change if you were to choose to reduce your monthly mortgage payments, but keep on adding whatever you're saving in monthly payments to your ongoing overpayments, and then reduce the mortgage term when you're out of your fixed rate period?

HappyMJ

MrsCorlett wrote: »

Hi all and thanks very much for your replies.


I was interested to see though what the views were on those two options lenders tend to give you when you overpay - i.e. use your overpayment to reduce the term, or use your overpayment to reduce monthly payments.


The usual advice is to opt to reduce the term (as if you reduce your payments you're not going to pay the mortgage back any quicker). However does that advice change if you were to choose to reduce your monthly mortgage payments, but keep on adding whatever you're saving in monthly payments to your ongoing overpayments, and then reduce the mortgage term when you're out of your fixed rate period?

My advice is to keep the term the same and allow the bank to reduce the monthly payment but I would continue to overpay. If you're paying £500 and they reduce the contractual monthly payment to £400 due to your overpayment then you can still continue paying £500 per month. The mortgage will still be paid off sooner and if you ever run into financial difficulty you can reduce your payment to the contracted payment without having to ask.

getmore4less

The real term(when you owe no more money) is decided by your payment not the contractual term.

audigex

If you continue making the same payment, it doesn't actually matter. It only matters if you intend to reduce your payment to the minimum monthly payment.

Carry on over-paying, and either the term "officially" reduces, or it unofficially reduces by the fact that the monthly payment will drop to the point it's negligible. At which time you'll be out of your contracted period anyway and can either pay off the rest as a single payment, or you can go onto the SVR and pay off the rest as fast as you like.

Personally I'd reduce the term if possible and easy and sure I can keep up the repayments, or reduce the minimum payment if the former would require re-checking of affordability or if I wasn't sure whether I could keep up the full or higher level repayments.

Yorkie1

HappyMJ wrote: »

My advice is to keep the term the same and allow the bank to reduce the monthly payment but I would continue to overpay. If you're paying £500 and they reduce the contractual monthly payment to £400 due to your overpayment then you can still continue paying £500 per month. The mortgage will still be paid off sooner and if you ever run into financial difficulty you can reduce your payment to the contracted payment without having to ask.

I reduce the monthly payment and keep my overpayments under review so that I continue to pay the same overall amount every month (you do need to keep an eye on maximum overpayment limits per year if your outstanding capital balance reduces and your o/p's go up).

This retains flexibility for the future, if my circumstances mean that I wish to reduce my monthly outgoings. As I've retained the original length, I will owe less but over the longer period - so reduced monthly payments. If I'd reduced the term, my monthly outgoings would remain the same.

If I continue to overpay, the mortgage will finish at the same time anyway, irrespective of whether term or payments are reduced.