Change term Vs lower monthly payments 19 September 2020 at 8:24AM in Mortgage-free wannabe 3 replies 61 views

Lumiona

I'm finally making some inroads to be MF and have almost made the 10% op this year and the bank have reduced the monthly payment to compensate for this. My understanding is that we should call the bank to reduce the term rather than reduce the monthly payments as it pays off more interest.
I called the bank to reduce the term rather than the monthly sum and they advised I'd have to go through an income/ outgoings check and pay a small amendment fee. Has anyone else come across this? Is this usual? Should I go through the process and pay the fee or use the smaller monthly sums to build up a lump sum to repay when the fixed term ends in 4yrs.

getmore4less

you probably have read to much into MSE advice which is often very light on the  important details.

It makes very little difference if the lender reduces the payment or you reduce the term after an overpayment. 

To give you an idea here are the numbers for a £100k 25y mortgage 2.5% over 1years with a 10% (£10k) overpayment 

amount	rate	payment	owing	interest
£100,000	2.50%	£448.62	£97,083.33	£2,466.73
£90,000	2.50%	£403.76	£87,375.00	£2,220.06
keep payment the same
£90,000.00	2.50%	£448.62	£86,830.41	£2,213.85

The overpayment saves £246
keeping the payment the same save £6.
(
Just stick the £45pm in a regular saver and overpay more at the next 10% window

billy2shots

Keeping the term length the same gives you greater opportunities and flexibility for those 'tough' months if money is short as your repayments are reduced by not lowering the term. 

This obviously becomes a negative if you have much more than the allowed 10% overpayment left meaning you are restricted in how much you can chuck at the mortgage. 

Recent history suggests, investing spare money outperforms mortgage overpayments but that has always been a slight gamble as it's fairly rare to get a guaranteed saving rate higher than the mortgage rate. Yes it does happen but the reality is a few £s difference and not life changing sums. Larger investment returns are a result from that early mentioned gamble where you put the extra cash into a stockks and shares ISA. Over the last 10 years, a low cost sensibly selected portfolio would have seen you financially better off than overpaying the mortgage. 
That was the last 10 years, the next 10 is up for debate though and I personally am not in such s rush to go that route. 


In your shoes I would go with certainty. Keep the term the same which lowers the monthly. overpay the max each month. Stash any extra left over in the best guaranteed saving institute and product and when your mortgage product comes to an end, chuck all the savings at the mortgage before you take up a new product. 

That's just me though. 

Sistergold

My product is such that I can reduce term or reduce monthly payment with no penalty or affordability test this is a product I chose right from the start. The honest truth is as long as you are focused on overpaying in the long run the interest saved by reducing term or reducing monthly payment will not matter much. When I overpay I choose to reduce monthly payment and keep term the same. This will give me flexibility if money should ever become right and enables me to save more and even make bigger overpayments. After some years I will then save enough to pay off the mortgage as I would have reduce balance drastically. 

In your case better let the repayments go down and once fixed rate is over before fixing next product you then make a huge overpayment if you choose. At this point you could even pay off the mortgage if funds permit.