Mortgage overpayment - reduce term?

julicorn

I guess (and would like to hear other people's input on this one!) reducing the term does increase the amount you pay automatically every month though (or at least keeps it more consistent) compared to just overpaying, which might be an advantage if you're getting towards the limits of how much you're allowed to overpay in a year? For example, I'm currently considering asking our lender to reduce our term as a result of our overpayments at our annual review, because I'm getting fairly confident that we'll be able to OP by 10% next year (that's as much as we're allowed). If we're not asking to reduce the term, our monthly payments will drop by £60/month this December, effectively reducing the amount we're allowed to pay off by £720.

I don't know, maybe I'm overthinking this one, but it would be great to hear some thoughts. I should add that we're also currently overpaying by quite a lot (our OPs are currently around 1.75x our standard monthly payments, so total payments are 2.75x what we need to pay), so we should be quite comfortably even if the interest rates were to rise quite significantly.

getmore4less

julicorn wrote: »

I guess (and would like to hear other people's input on this one!) reducing the term does increase the amount you pay automatically every month though (or at least keeps it more consistent) compared to just overpaying, which might be an advantage if you're getting towards the limits of how much you're allowed to overpay in a year? For example, I'm currently considering asking our lender to reduce our term as a result of our overpayments at our annual review, because I'm getting fairly confident that we'll be able to OP by 10% next year (that's as much as we're allowed). If we're not asking to reduce the term, our monthly payments will drop by £60/month this December, effectively reducing the amount we're allowed to pay off by £720.

I don't know, maybe I'm overthinking this one, but it would be great to hear some thoughts. I should add that we're also currently overpaying by quite a lot (our OPs are currently around 1.75x our standard monthly payments, so total payments are 2.75x what we need to pay), so we should be quite comfortably even if the interest rates were to rise quite significantly.

That would be one of the reasons to look at increasing contractual payments by reducing contractual term.

Just asking for the payment the same/reduce term option does not always reduce the contractual term that needs a full affordability checks and potentially fees.

Also some lenders when you want to keep the payment the same count them as overpayment not really reducing the contractual term.

If on short term fixed rates you can just accumulate the surplus and pay it at next product change.

With amounts like £720 there are probably regular savers paying more than the mortgage rate, better off saving.

If this is a planned ongoing strategy maybe look at products without overpayment limits there are quite a few out there.

sparkey1

julicorn wrote: »

reducing the term does increase the amount you pay automatically every month though (or at least keeps it more consistent) compared to just overpaying, which might be an advantage if you're getting towards the limits of how much you're allowed to overpay in a year? For example, I'm currently considering asking our lender to reduce our term as a result of our overpayments at our annual review, because I'm getting fairly confident that we'll be able to OP by 10% next year (that's as much as we're allowed). If we're not asking to reduce the term, our monthly payments will drop by £60/month this December, effectively reducing the amount we're allowed to pay off by £720.

Ok, I can see where you are going wrong.

Reducing the term, increases your monthly payments. Correct.

Your monthly payments dropping by £60 does not reduce the amount you can overpay by £720. Your 10% overpayments are calculated on the overall balance not on your payments.

So if loan was £200K, you can pay £20K in year one. Year two, balance is £180K, therefore you can overpay by 18K.

If you get to your 10 per cent limit, save the rest. At the start of the repayment year, use the lump sum saved as a larger single overpayment.

You say you are fairly confident you can pay a higher amount. This is what actually happens when you reduce your term. Your lender has to reassess you to make sure you aren't overstretching your self. If it is happy, you have to pay more each month. However next thing you know, you have a difficult month and it goes wrong. Before you know it, you are in arrears. But had you not changed the term the payments would have been affordable, and your account would be ahead, and not in arrears.

For a more in depth answer, post your lender, your mortgage balance and monthly payment.

julicorn

sparkey1 wrote: »

Ok, I can see where you are going wrong.
Your monthly payments dropping by £60 does not reduce the amount you can overpay by £720.

That's not what I'm saying. I'm saying that it reduced the amount we're allowed to pay off, because that included both the overpayment and the standard payments. If the overpayments are the same (maxed out at 10%), but the regular payment is lower, then that reduces the total amount we're paying off.

I know it's not a huge amount of money, but we're already maxing out our regular savers at 5%, and would rather pay it towards the mortgage. Also, i get the point about 'difficult months', but we've got a healthy job loss fund of 6 months worth of outgoings, and have saved up for pretty much all irregular expenses.

Changing to a lender/product which allows unlimited overpayments is a very good shout though. Our 2 year fix runs out next July, so will do some shopping around then.

julicorn

getmore4less wrote: »

That would be one of the reasons to look at increasing contractual payments by reducing contractual term.

Just asking for the payment the same/reduce term option does not always reduce the contractual term that needs a full affordability checks and potentially fees.

Also some lenders when you want to keep the payment the same count them as overpayment not really reducing the contractual term.

If on short term fixed rates you can just accumulate the surplus and pay it at next product change.

With amounts like £720 there are probably regular savers paying more than the mortgage rate, better off saving.

If this is a planned ongoing strategy maybe look at products without overpayment limits there are quite a few out there.

That's very helpful, thank you

getmore4less

With healthy cash flow and decent savings an offset may be an option to consider.

Not as good as they used to be but still viable to allow a lot of flexibility with what you do with the money.

getmore4less

sparkey1 wrote: »

Ok, I can see where you are going wrong.

Reducing the term, increases your monthly payments. Correct.

Your monthly payments dropping by £60 does not reduce the amount you can overpay by £720.

It is the total payment that counts, that does change if the contractual goes down.


julicorn has not got it wrong.

fewcloudy

takman wrote: »

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.

I think you've misunderstood what the previous posts were saying. The end of post #2 used the word commitment, and that is where the misunderstanding seems to have arisen. Sometimes when people range to overpay they agree to a new, shorter term. A new term and payment amount are agreed. Thus they are now committed to paying a higher amount each month. Problems arise if they can no longer pay the higher premium for whatever reason. They are committed to paying it. I think you are talking about a different scenario?


I overpay by the same amount each month. On the front of my statement is the original date that the mortgage will finish on, as that is the agreement I have and continue to have.
On the reverse is an sentence along the lines of "if you continue to overpay each month by X amount, you will have repaid your mortgage by X date" (about 7 years earlier).
If something happens in my life, or interest rates return to over 5%, and I no longer wish to overpay, then I call them and it stops from the next month.
I have done this several times over the years due to kids going through Uni/moving to London etc.
And obviously I think this is the preferred way to overpay, as it offers flexibility.
And so to the OP I would say that term reduces due to overpaying, but it's by default I guess! If you pay more each month then you reach the balance of zero sooner.