Overpay mortgage or decrease the term?

GracieA

Are the two things in the title essentially the same thing?

My issue is that we have recently moved house. We wanted to keep the main part of our mortgage over 20 years and all insurance etc was set up for this (we have decreasing critical illness and life insurance). Just before it was all sorted our mortgage broker advised that the bank wanted us to have the mortgage over 25 years instead. He said the reason was affordability which didn’t make much sense as they had originally offered to lend us much more.

Anyway, to stop any delays we agreed with the plan of reducing the term immediately on moving so it would match our insurance terms.

My question is, do we need to do this or will overpaying by the amount to make it up to the 20 year premium essentially do the same thing?

We also have a smaller part of our mortgage which has 14 years left. When this is paid we intend to put the whole lot towards what is left of the main part so we are hopeful we won’t need the full term anyway.

We are allowed to overpay by 10% of The remaining balance a year without penalties. Will this become a problem as the balance goes down?

I’m just looking for a bit of advice as I’m not very financially minded and don’t understand fully how it works. I’m mostly worried that should we need it, there will be a discrepancy between the mortgage balance and the critical illness/life insurance pay out.

Thanks.

Medihv

Hello GracieA,

Overpaying can usually do 2 things:

1 - reduce the term of your mortgage
2 - keep the term the same but lower your monthly payments

Here are some calculators you can use:

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

https://www.halifax.co.uk/mortgages/mortgage-calculator/overpayment-calculator/

https://www.lloydsbank.com/mortgages/mortgage-overpayment-calculator.asp

I make make my overpayments monthly online, admittedly I can only afford £100 a month. But that will save me a fair bit in interest and time. When I make my overpayments I get the option to reduce the term of to reduce the payment. I personally always click to reduce the term because I would only end up spending the extra cash I would be saving on payments on things that I don't need

I think you may have to ask your bank to confirm what the overpayments will do. I believe that it is fairly common now for overpayments to reduce the term, other may comment and correct me on this.

And it is good that you have identified the amount you are able to overpay. There are usually fees if you overpay above this amount. However that 10% is usually only valid during your offer period. Did you take out a mortgage with a lower rate for say 2,3,5 years? usually you cant overpay too much during that term, and after that you can overpay more.

Hope this helps

Farmerbob

Personally I would not worry about the insurance being out of sync with the mortgage balance, it wont null and void the cover if the balance is less than what the cover is set to.
If you have the ability to overpay and are happy to do so overpay as much as you are able to writhin the set allowance, itll reduce the interest over the lifetime of the mortgage

Hope between what Medihv and I have said puts your mind to rest

Thrugelmir

GracieA wrote: »

He said the reason was affordability which didn’t make much sense as they had originally offered to lend us much more.

I'd be surprised if you were offered more only to have it reduced. Until you have a formal offer document anything else is far from guaranteed.

GracieA

Medihv and Farmerbob - thank you both! That does really put my mind at ease. The calculators were really useful.

Thrugelmir - of course I!!!8217;m aware that nothing is certain until any formal offer is made. I just meant that in a meeting before we had found a house an agreement in principle stated we could borrow much more; we didn!!!8217;t need it in the end. I know this isn!!!8217;t set in stone by any means but it just added to the surprise that they insisted on a longer term mortgage.

mark55man

Insisting on the longer mortgage to try and get you to pay more interest to them.

In some ways it could be helpful if you construct and deliver a payment plan against a 20 yr repayment then its irrelevant if the bank thinks you have 25years!! A longer period builds in a bit of flexibility in the future if changes in your circumstances or the economy means you need to reduce your payments to the least possible (ie these will be lower on a 25year term).

However as someone coming within 10 years of finishing, I now bitterly regret some decisions (like the one your bank is offering you) that pushed this end date out, so stick with your plan if you possibly can!!

getmore4less

Term decides the minimum payment.

What you pay determines the true term and cost, contractual term is not relevant.

Subject to any penalties on overpayments and redemption charges.

on 20/25years and 10% overpayment allowance this is not an issue for a very long time and your mortgage will most likley have changed again by then anyway.

eg 100k @ 3% first year 10k overpayment allowed
20y £555 25y £475 (£80*12=£960) plenty of headroom

After 10 years paying £555 you have £57,400 left and overpayment limit of £5740k

10y £555 15y £400 (£155*12=£1860) still loads of headroom.

As you have 2 parts you need to look at where the overpayments go.

if the new part is a lower rate than the old part could look at making the new one even longer term.


The downside of an optional lower payment is you might just spend the money.