Reduce term vs Reduce mthly payment when overpaying

mort_paul

Hi
In relation to overpaying when spare cash is available, something I can't find the answer to in relation to martin Lewis' comment below :
"If your mortgage provider alters your repayments to keep the term the same.........you won't save on your interest payments, and the lender will earn more."


If I overpay on a repayment mortgage but keep the term the same, I understand my overpay to come straight off the capital, so the interest over that unchanged term is on a lesser amount of capital, thus resulting in a saving of £Xxx. Consequently my monthly standard payment reduces in line.


If my understanding is correct, how does the above saving method compare against Martin Lewis' advice to reduce the term and keep monthly payments the same figure?
I can use the mortgage calculator to work from Martin Lewis' advised method but unsure of the overall result of the method I have always been familiar with.

Typhoon2000

If the term remains the same after the overpayment, but your monthly payments are reduced, you would be paying off the capital remaining at a slower rate ( reduced monthly payments) than you would if you kept to the same monthly payment.
All you have to do is to over pay each month by the same amount as the monthly reduction to effectively end up paying the same every month, and your term will effectively reduce.

iamsalt

Can I add a daft question to this thread, what do you say to the mortgage provider in order to make sure they get this right? I made an over payment and it looks like the monthly amount has been reduced, despite me suing I didn't want that to happen.

Thanks

HHarry

Iamsalt,

It may depend on your lender as to what happens. With some the payment has to be over a certain amount before you get a choice. Also, I think there have been examples more recently of Banks not being prepared to reduce the term as this is a change of the contract terms and requires them to re-assess the affordability.

Anyway, if you ask that any overpayment reduces the term, not the monthly payment, that'll get you where you want to be. If they won't do that then put any saving in your monthly payment into a seperate account and make another overpayment when convenient.

iamsalt

Thanks - much appreciated

pathtofreedom

I think it also depends on your type of mortgage for a lot of this. Mine is an offset, so I have daily interest added which changes depending on how much I have in the savings accounts linked to it. I also do OP's on top of the offset.

For me having a lower payment is more important than a shorter term, as I will get to the point of paying no interest eventually if I can get the savings to balance the outstanding capital. So then I could look at going part time or would have more options on if I actually pay it off, or just think of it like a 0% credit card.

Thrugelmir

iamsalt wrote: »

Can I add a daft question to this thread, what do you say to the mortgage provider in order to make sure they get this right? I made an over payment and it looks like the monthly amount has been reduced, despite me suing I didn't want that to happen.

Thanks

Sometimes it depend on how the lenders internal systems work. If you pay by direct debit then switch it to standing order. Then you'll control the amount that is paid every month. Rather than the lender auto adjusting the direct debit.

With online banking easy to amend standing orders. Though onus is on you to make sure that at least the correct amount is paid. Short paying will result in arrears nounting and charges being levied.

getmore4less

term is irrelevant all it does is decide your min contractual payment.

What matters is what you pay.

The more you pay the sooner you pay the smaller your total interest bill will be over time.

getmore4less

mort_paul wrote: »

Hi
In relation to overpaying when spare cash is available, something I can't find the answer to in relation to martin Lewis' comment below :
"If your mortgage provider alters your repayments to keep the term the same.........you won't save on your interest payments, and the lender will earn more."

Not strictly true


If I overpay on a repayment mortgage but keep the term the same, I understand my overpay to come straight off the capital, so the interest over that unchanged term is on a lesser amount of capital, thus resulting in a saving of £Xxx. Consequently my monthly standard payment reduces in line.


If my understanding is correct, how does the above saving method compare against Martin Lewis' advice to reduce the term and keep monthly payments the same figure?
I can use the mortgage calculator to work from Martin Lewis' advised method but unsure of the overall result of the method I have always been familiar with.

lets look at a mortgage £100k @ 4% 20y with and without 5k overpayment with and without changing the payment.

look at the total interest paid.
£100k @ 4% 20y £606.00pm £45433
£095k @ 4% 20y £575.68pm £43164 (overpay adjust payment down)
£095k @ 4% 20y £606.00pm £39629 (overpay keep payment the same)
(paid off in 222m + £95 that's almost 18 months early)

As you can see you still save from the overpayment adjusting payment down to full term.

If you keep overpaying(that's all keeping the payment the same does) you save even more(no surprise).

As long as you can keep overpaying and don't hit limits where ECR charges kick in it only matters what the total payment is, bigger is better.

Its all about overpaying sooner the better.

mort_paul

Thanks for that. I thought there must be a saving of some sort to be had even when keeping the term the same but obviously if you choose to keep payments the same that's the opportunity to overpay moreso.