Mortgage overpayment - reduce term?

MarchIn

Greetings from South West, new forum user here.

Everywhere I look, I see repeated like mantra - always reduce term when overpaying.
Does it always apply? Or perhaps it depends on specifics of one's mortgage?
Can I ask someone to provide math/numbers backing their opinion? Just as example.
I did contact lender asking for equations so I could compare reducing term and reducing monthly payment , but person I spoke with seemed to be even less informed then I am.
I couldn't find overpayment calculator that could simulate accurately, I understand spreadsheet is my best friend?

First time buyer, lender is LBS, 95%ltv, 10% of OB allowed, £1000+ overpayment required

Regards.

getmore4less

Everywhere I look, I see repeated like mantra - always reduce term when overpaying.

It is very misleading(rubbish is a better description) in most* cases.

What matters is the payment as that is what determines the real term.

What you do by reducing the term is commit to a higher payment

* where it can make a difference is where you have a lender that allows continued high payments even if you hit the overpayment limits, a lot don't.

Since you want some numbers.........

you get claims it saves loads of money by reducing the term over reducing the payment

guess how much.......

lets take a simple example 25y £100k 2.5% £10k overpayment and see where we are end of year 1.

£100k 2.5% £448.62pm £97,083.33
£090k 2.5% £448.62pm £86,830.45
£090k 2.5% £403.76pm £87,375.00

the last one has (£44.86*12) £538.32 in the bank making the net debt £86,836.68

The £10k overpayment saves £250 in interest

Keeping the payment the same saves an additional £2.88
reducing the payment reduces the saving by £3.35
total difference is £6.23



Reducing the term is just committing to higher payments which can be done by overpayments anyway giving choice

Term just sets a payment what really matters is the payment.

sal_III

MarchIn wrote: »

Everywhere I look, I see repeated like mantra - always reduce term when overpaying.

Strange, it's first time I'm hearing about this "best practice". Where did you see it recommended?

At the current low rates it makes little difference in terms of overall cost if you reduce the term or not.

On the other hand it makes the higher monthly payments mandatory, instead of optional, limiting your options in case of cash flow problems or unexpected expenses occur in the future.

So hardly beneficial.

sparkey1

When you reduce the term, you commit to higher payments. If you later want to extend the term, it can be seen as negative.. ie are you struggling.

So if you are overpaying, dont reduce the term. Overpaying normally means you pay less interest in future months, therefore less per month.

Therefore as your loan payments are lower, you are seen to not be overstretching.

takman

sparkey1 wrote: »

When you reduce the term, you commit to higher payments. If you later want to extend the term, it can be seen as negative.. ie are you struggling.

getmore4less wrote: »

What you do by reducing the term is commit to a higher payment

sal_III wrote: »

On the other hand it makes the higher monthly payments mandatory, instead of optional, limiting your options in case of cash flow problems or unexpected expenses occur in the future.

I think it's misleading to say your committing to "higher" payments.

If you overpay and and reduce the term the payments stay the same as in the original agreement, the term is simply shorter due to more being paid off early.

If you overpay and keep the term the same then the payments reduce to compensate for the higher amount paid initially.

The payments don't actually increase above what you originally agreed to pay.

sal_III

takman wrote: »

I think it's misleading to say your committing to "higher" payments.

If you overpay and and reduce the term the payments stay the same as in the original agreement, the term is simply shorter due to more being paid off early.

If you overpay and keep the term the same then the payments reduce to compensate for the higher amount paid initially.

The payments don't actually increase above what you originally agreed to pay.

Nothing misleading in what we said. On the other hand the bold bit of your statement is simply false.

The original agreement is for X/month, when you reduce the term it becomes Z/month, the overpayment is voluntary, not part of the binding agreement. Although you might make the same monthly payments in both cases, there is a not so subtle difference.

If you keep the original longer term You can revert back to paying X/month at any point with no repercussion and usually no effort.

If you sign for shorter term you are stuck at paying Z/month and can't revert back to paying X/month without renegotiating longer term which might or might not be accepted by the Lender.

takman

sal_III wrote: »

Nothing misleading in what we said. On the other hand the bold bit of your statement is simply false.

The original agreement is for X/month, when you reduce the term it becomes Z/month, the overpayment is voluntary, not part of the binding agreement. Although you might make the same monthly payments in both cases, there is a not so subtle difference.

If you keep the original longer term You can revert back to paying X/month at any point with no repercussion and usually no effort.

If you sign for shorter term you are stuck at paying Z/month and can't revert back to paying X/month without renegotiating longer term which might or might not be accepted by the Lender.

Your logic makes no sense.

Lets say you have a mortgage and the payments are £300 a month for 25 years for example.

If you voluntarily overpay £2000 in one year (this could be spread out monthly or in one lump sum or however you want).

As you have overpaid one of two things must happen:
1- You choose to reduce the term and the payment stays at £300 a month
2- You choose to keep the term the same and the monthly payment reduces

You cannot overpay an amount and then keep paying the original £300 for the original term because you will pay more than you need to. So if you overpay you have to choose for either option 1 or option 2 to happen.

getmore4less

For a given rate and debt the shorter the term the higher the payment that has to be paid.

It's that simple.

What you pay determines how long it takes to pay off the mortgage the term only determines the minimum payment.

There are lenders(like barclays) that are happy to keep a payment at what ever level you want and not reduce term or reduce payment its an option in my T&C.

Thrugelmir

takman wrote: »

The payments don't actually increase above what you originally agreed to pay.

They will as and when interest rates rise. You'll have a shorter term to contend with too.

Hence why lenders check affordability before contractually agreeing to shorten the term. In case it poses a danger to the borrower. Otherwise they would be deemed to have provided poor advice. Which leaves them open to customer compensation claims. PPI et al is a lesson learnt.

MarchIn

getmore4less wrote: »

Reducing the term is just committing to higher payments which can be done by overpayments anyway giving choice

That was my initial thought.

sal_III wrote: »

Strange, it's first time I'm hearing about this "best practice". Where did you see it recommended?

"If your mortgage provider alters your repayments to keep the term the same, although it will boost your monthly disposable income, you won't save on your interest payments, and the lender will earn more. So be sure to tell it to keep your monthly repayments fixed" - moneysavingexpert.com/news/mortgages/2015/03/decrease-the-term-or-overpay-my-mortgage-martin-lewis-answers

"Ensure that any overpayment you make goes to reduce the debt (so shortening the term) rather than reducing your monthly payments" - MSE Overpayment calculator

Plenty more on web from different sources.

I wish to thank everyone for their input.
Regards.

getmore4less

MarchIn wrote: »

"If your mortgage provider alters your repayments to keep the term the same, although it will boost your monthly disposable income, you won't save on your interest payments, and the lender will earn more. So be sure to tell it to keep your monthly repayments fixed" - moneysavingexpert.com/news/mortgages/2015/03/decrease-the-term-or-overpay-my-mortgage-martin-lewis-answers

"Ensure that any overpayment you make goes to reduce the debt (so shortening the term) rather than reducing your monthly payments" - MSE Overpayment calculator

Plenty more on web from different sources.

I wish to thank everyone for their input.
Regards.

it does make a difference but not in the way implied, you still save interest you just save less if you don't continue to overpay.

Taking the previous example and the one off £10k payment through to being paid off in full rather than just a year

amount, rate, payment, interest, time to clear debt

£100k 2.5% £448.62pm £34,585.02 25y
£090k 2.5% £448.62pm £26,661.48 21y 8m
£090k 2.5% £403.76pm £31,126.52 25y

Keeping the payment as high as possible is good, even smallish overpayments have a significant cumulative effect over the full term.

borrow less(large overpayments, pay more(larger regular payments)
Pay the money off the debt as soon as you have it available

That is the important message .

Reducing term is not the best or only way to do it and is overplayed/pushed far too much.

Keep the term as long as you can(avoiding ERC limits) to give the choice to lower payments.