One-off overpayment on a fixed rate mortgage: reduce monthly payments or reduce term?

DavidC123

Hi all

Long time reader, first time poster. I have a question that I can not a straight answer out of my mortgage provider on. Grateful for any advice please.

I am into the 2nd year of a 5 year fix deal and luckily have a lump of cash to make an one-off overpayment with. I have the option to reduce the monthly payments or reduce the term. Martin's blog says always reduce the term but by my calculations it is actually better overall to reduce the monthly payment.

The key point that makes this interesting is: I am only interested in the savings I'll make by the end of the fix (3 years 10 months) and not the savings over the whole term (c.19 years) as at the end of the fix, presuming I remortgage, I would have used that lump sum of cash to reduce my next mortgage capital or term anyway.

Here are the figures from their overpayment calculator assuming £20,000 overpayment with 46 months left of fix:

CURRENT
Value of mortgage remaining: £206,238
Current monthly payment: £1131
Value at end of fix: £171,152

REDUCE MONTHLY PAYMENT
Value at end of fix: £153,955
New monthly payments: £1020

REDUCE TERM
Value at end of fix: £149,277
Monthly payments remain the same

So, the comparison on my savings from the overpayment is:
RMP: [(1131-1020) x 46 ] + [171152 - 153955] = £22,303 i.e. £2,303 saved
RT: 171152-149277 = £21,875 i.e. £1,875 saved

So actually my total savings during the term of the fix for reducing the monthly payment are better than reducing the term. Does this make sense? I know that the overall term would still be longer (by about 2.5 yrs) if I only reduced monthly payments but if I remortgage at the end of the fix I can change that anyway.

Thanks in advance for any advice!

getmore4less

Your calculations don't pass the does it smell right test.

Common sense says overpay and you save money(which is what keeping the payment the same does).

rate would have been useful but a guess at around 2.33% gets numbers close enough to yours.

3y 10m
£206,238 2.33% £1121pm £171,122
£186,238 2.33% £1020pm £154,591
£186,238 2.33% £1131pm £149,255

owe £5336 less but paid £111*46=£5106 more.

£230 better off keeping payment the same.

Looks like you got the amount remaining on the reduce payments wrong

DavidC123

Hi - thanks for the reply. Indeed I believe you are right! It is 2.34%, i checked the numbers again:

3y 10m
£206,238 £1121pm £171,152
£186,238 £1020pm £154,673
£186,238 £1131pm £149,277

So owe £5396 less but paid £5106 more so better off by £290. This makes more sense to me now. Thank you.

Can I therefore check quickly, does this mean the actual money I will save during the remainder of the fix is:

RMP: [(1131-1020) x 46 ] + [171152 - 154673 = £21,585 i.e. £1,585 saved
RT: 171152-149277 = £21,875 i.e. £1,875 saved

I ask because the bank quotes "you can save up to £10,000 by overpaying £20,000" but since it's a fix and you can do what you want after the fix ends, the reality is you'd only save those above two numbers during the fix.

Is this correct???????

Thanks again in advance!

getmore4less

Over full term 19y 20k overpayment saving 10k in interest is about right give or take. If the regular payments are kept the same it could well be more.

got to calculator (got it a bit wrong)


http://www.whatsthecost.com/mortgage.aspx

@ 2.34% over 19y

£206,238 £1121pm interest £49,452
£186,238 £1013pm interest £44,614
£186,238 £1121pm interest £39,049

ok you need to keep the payments the same to save the full £10k


In the old days you use to look at mortgage and say the interest over term will be the same as what you borrow if you don't overpay.

ie borrow £100k it will cost £200k to pay it off

these days with rates lower £100k 5% over 25years is £75k interest

Push that out to 35years and lower the rate to 2.5% and it is still at £50k interest.

pay it over 10 years £13k interest

DavidC123

Thanks again.

Just to check, am I right with it being a £1,585 / £1,875 saving over the remainder of the fix if I pay the £20,000 lump sum now?

Basically I'm trying to work out if it's worth overpaying it or not.

Thanks

getmore4less

can you get a better rate (net elsewhere)?

there are other options like pension.

treat the OH.

when all other options are exhausted over pay saves interest

yu have checked there is no charge for a £20k overpayment?

DavidC123

No better rate elsewhere unfortunately, no pension options and she's treated well enough already! Haha. Also no charge for the overpayment.

All that being right, are my calculations on the actual savings during the fixed rate correct?

DavidC123

Sorry to bump - could the kind person above or anyone else with the knowledge confirm if I am right with how much would be saved over the length of the fix?

Many thanks!

medusasmummy

Personally i would leave the term alone and have the monthly repayments reduced.

I would then make a regular monthly over payment of £100 so that the payments remained the same.

This then reduces the term, and gives you the flexibility in tighter money months to stop the over payment and pay a lesser amount

win win

DavidC123

Thanks again for the replies but I'm still hoping someone can answer my direct question please:

Am I right with it being a £1,585 / £1,875 saving over the remainder of the fix (see my 2nd post) if I pay the £20,000 lump sum now as a one-off?

DavidC123

Bump - am desperate for an answer to my question please if anyone knows? Thank you in advance!