Mortgage overpaymens

Jayr0706

I'm looking for some advice but not sure if it's a daft question or not. I'm currently overpaying on my mortgage but have the payments stay the same so it reduces my term. Is there any advantage on changing it so it reduces the payments leaving the term the same but each month increase my overpayment by the amount my my mortgage payment reduced? Would the result in more money been paid off the capital overall? How that's not too confusing thanks

amnblog

What is the point of reducing the contractual payments if you are overpaying every month?

The more you overpay, and the faster you do so, the sooner the debt is cleared. The contractual payments are not relevant when you overpay every month.

Nitram29

Some mortgage providers will adjust your payment on yearly basis, others will shorted the term, one reason for not adjusting too quickly is in case you want a payment holiday.

Depends on the provider, ask them if you want to be sure.

dimbo61

If you can just overpay each month.
You are used to your mortgage payment being £xxx each month
you will save a huge amount in interest

AnotherJoe

The trouble with reducing the term is, it’s like a ratchett, once reduced it stays there and you are committed to that term. If you arrange it so the payments are reduced and the term stays the same, you can still get the same reduced term in practice but you aren’t locked into that and can reduce payments if necessary.

FWIW there are a lot of people losing a lot of money by focussing on reducing their mortgage whilst their pension is disregarded and they throw away tax relief. Especially true for high rate tax payers who statistically are more likely to be over payers..

specialkaye

AnotherJoe wrote: »

FWIW there are a lot of people losing a lot of money by focussing on reducing their mortgage whilst their pension is disregarded and they throw away tax relief. Especially true for high rate tax payers who statistically are more likely to be over payers..

Another Joe - can you explain this please?


Thanks,


Specialkaye

dimbo61

What Joe is saying is that you get Tax relief on money put into a pension which is 20% for basic rate tax payers and 40/45% for higher rate tax payers.
You mortgage debt is what 3/4/5%

AnotherJoe

specialkaye wrote: »

Another Joe - can you explain this please?
Thanks,
Specialkaye

Well, let’s say you pay off £100 of your mortgage. That’s saved you say £2 each year (if your rate is 2%) . But if you are a high rate taxpayer probably that actually cost you £150 earned income.

Alternatively take that £150 and put it in your pension so you pay no tax on it so you get a full £150, and at a cautious 5% growth rate in the pension, that earns you £7.50 each year, a fiver more than the £2 you saved on your mortage overpayment plus the extra £50 one off . Some of that extra £50 will go back in tax when you eventually take your pension but odds are you’ll get back half of it.

If you want To get really clever you can also take into account inflation.
If you pay £1 off your mortgage right now that’s cost you £1. Wait 30 years and that £1 in your mortage even at low rates of inflation, say 2 or 3%, is worth only about 50p because your salary will roughly have tracked inflation, eg even if on the same relative wage, your salary of say £30k now will be £60k in 30 years time.

So basically, don’t be in a rush to pay your mortage off focus on your pension at least equally with it.

SG27

Jayr0706 wrote: »

I'm looking for some advice but not sure if it's a daft question or not. I'm currently overpaying on my mortgage but have the payments stay the same so it reduces my term. Is there any advantage on changing it so it reduces the payments leaving the term the same but each month increase my overpayment by the amount my my mortgage payment reduced? Would the result in more money been paid off the capital overall? How that's not too confusing thanks

It saves the same amount either way. But if you overpay to reduce your future payments then if you need to in the future you can drop ro paying the reduced amount. Also with interest possibly rising again over the coming years theses overpayments will offset any potential increase in your payments.

I have just switched to reducing my future payments for this reason