Confusion with overpayments....

ErolGirl

Hi

I just called my bank to increase my monthly mortgage payment and they asked whether as a result of the overpayments do I want my monthly repayment amount reduced or the term reduced.

They won't advise me which to do because they are not allowed but I can't get my head around which is the better way of doing it? I essentially want to be paying less in the long run as does everybody!

Which is best? Any help appreciated :money:

System

Reducing the term would be best

SalsaDanca

Reducing the term will save you the most interest.

Reducing the monthly payment gives you flexibility. As your mortgage payment goes down, you will have more money that you can use for other things. You can spend it, or use it to make more overpayments, or just relax knowing that you now need a slightly lower income to pay your bills. If you always use the money to make more overpayments, you'll save just as much interest as if you'd reduced the term, but there might be a limit to how many overpayments your bank allow you to make.

lixi

I choose to reduce the monthly payment as it builds in more flexibility.

That said I am unlikely to change my mortgage and have no max or limit on overpayment so there is no downside to it for me. Reducing the term doesn't on the face of it save me interest. Keeping to an overpayment schedule does that irrespective of required minimum payments.

If you have a limit on overpaying then I suppose reducing monthly payments can in effect restrict how much you can overpay on some mortgages I think.

Reducing the term ties you in to the same payments for a shorter term. It wouldn't be my preferred option unless you can work out a considerable upside based on your own deal.

greent

All things being equal the end result would be the same. However, things aren't always equal. Payments give flexibility and was how I chose to do it. However, we had no OP limits after the first couple of years, as we moved to SVR. If you have OP limits (eg 10% pa) then you may wish to reduce the term instead.

If you're tracking it all on a spreadsheet it's almost immaterial, as you know that the end date won't be what they say it was anyway (by the end of our mtge my required payment a month was £8 in order to make the original end date. I never cared about making the term officially shorter as I was never going to take the time it stated)