If I overpay should I also reduce the term?

7sefton

Hello everyone

I appreciate this is probably a very basic question, but I’m new to mortgages and just want to make sure I’m doing the best, most effective thing with my overpayments...

When I make an overpayment on an ad hoc basis, should I also reduce the term to maximise the saving? Or is it normal practice to just overpay on it’s own?

Thanks for your advice

Hazelnutty

Yes, I'd reduce the term as then you'll pay less interest overall. Having said that, there may be times in your life when you need to reduce the monthly payment rather than the term e.g. if you have a period of lower income or new monthly costs arrive you need to deal with. But from the perspective of being mortgage free, aim to reduce the term

AnotherJoe

If you reduce the term, you are locked into that new shorter term.
If you hit "hard times" you may have a problem.
If you dont reduce the term, then as long as you cater for the now reduced payment with an additional overpayment*, the practical effect is the same since the term will practically decrease, but you always have the luxury to drop back to a lower payment without any bureaucracy or hoop jumping.



This all presupposes that there arent better uses for your money. People get obsessive here about overpayment and in many cases there are better ways to use it. For example on 25 year mortgage, in real terms the payments you are making at the end will be worth about half compared to the ones you are making at the start just due to inflation. By rushing to pay it off now you are paying with full value money instead of devalued money in 25 years time
And for many people, the extra money into a pension, especially for higher rate tax payers, is a massive bonus that outweighs the return on not paying low % mortgage rates. Though it seems from mutterings in the press that situation may not last much longer. All the more reason to take advantage whilst its going.



* eg supposes they calculate you now need pay £10 less a month then you make your overpayment (say) £110 instead of £100). Note that this will change each month.

cod3

I got completely confused by a conversation with Halifax by using the phrase "reduce the term" when I asked for advice on how to overpay recently.

If I wanted to reduce the term formally, I could ask them to reduce my term from say 12 years to 6 years and they would have to recalculate the amount I need to pay each month to finish early and do a 45 minute phone interview to check affordability.

What I actually meant was I wanted advice on finishing the mortgage earlier by paying the same amount as I do now and just throwing ad hoc overpayments at it. This would naturally "reduce the term" as the mortgage would be paid off sooner. I think I was overthinking it!

mumof3.12kindebt

personally I'd reduce the monthly amount to an amount you are comfortable with then switch it to reducing the term. This way if you fall on bad times your mortgage is at a low repayment each month