Overpaying mortgage

greg85

When you decide to overpay your mortgage certain banks allow you to decide how the overpayment will affect the mortgage, you can choose between the following:

1). Reduce my mortgage term
2). Reduce my monthly mortgage payment
3). Keep my existing mortgage payment and term the same

Let's say you're on a 5 years fixed rate, and after that you switch to svr rare. The full mortgage term is 25 years. Obviously option 2 is the least beneficial as it doesn't shorten the mortgage term. However, what's the real difference between option 1 and 3 above? Does choosing option 1 reduce your 5 years fixed rate term? I'm confused between option 1 and 3. Thanks in advance for your help

Nebulous2

Option 1 doesn't reduce your 5 years. It reduces the 25 years, the 5 years fixed rate stays the same.
Option 3 as I understand it keeps your options open. It builds up an overpayment, which can be used later to do 1 or 2 or possibly even give you a payment holiday if you hit a period of reduced income.

Retired_Mortgage_Adviser

If you look at it another way, Option 2 is better than Option 1 as overpaying and reducing the term do exactly the same thing with respect to interest saved. Option 2 having the advantage that you can stop your overpayments any time you want.

https://www.moneysavingexpert.com/news/2015/03/decrease-the-term-or-overpay-my-mortgage-martin-lewis-answers/

Option 3 depends on the lender/product. For example Nationwide will automatically recalculate the monthly payment at the end of the fix when there's a change in product.

getmore4less

Term is just to set minimum contractual payment.

What determines the cost of a mortgage is the payment.

The more you pay the cheaper it gets.
(unless you hit overpayment limits)

Moneyminded

Have you spoken with your lender to ensure you fully understand the options that are available to you? Are here any penalties or limits to overpaying for example?

Thrugelmir

With option 1. you are committed to the higher monthly outgoing. Bear in mind that interest rates may rise again in the future. While option 3. allows you the flexibility not to commit to a permanent higher outgoing. Perhaps you'll incur an unexpected expense such as a major car repair and would find having the money usefull. Rather than say incurring credit card interest for a few months.

pinknsparkly

Option 3 is simply deferring the decision between Option 1 and Option 2. Our mortgage is with Halifax, and they use Option 3 (unless we pay off a huge lump sum, I believe). We can specifically request them to action Option 1 or Option 2 if we wished, but have decided not to do that in order to allow us flexibility.

Our mortgage at the moment is large enough that we are not going to come anywhere close to hitting the 10% overpayment limit for years and years so we could opt for either Option 1 or 2 without it affecting how much we could overpay. However, leaving our overpayments as Option 3 means that we have the option of reducing our required minimum monthly payments if required, such as in the event of losing a job or maternity leave.

As has already been pointed out, choosing Option 1 won't reduce the length of your fixed term mortgage - it reduces the total, overall length. So if you have a 5 year fix on a 25 year mortgage and over pay enough to shorten it by 6 months, your fix is still for 5 years, but the total length of your mortgage will only be 24.5 years.

Edited to add: you also can't defer the decision between the two options indefinitely. When you come to remortgage at the end of your 5 year fix, you have to decide which option to go for. We, currently, intend to keep our term the same and continue to overpay because, as I said above, we'll still not be in a situation where our overpayments come anywhere close to the 10% and we value the flexibility of being able to reduce our payments if necessary.

greg85

That's great thanks for the input everybody. I have a better understanding of it now.