Overpaying or shortening term on mortgage - overpaying better?

Fisbister

Hi there. I have what I imagine is a very simple questions but so farro mortgage adviser has been able to properly answer or explain to me. Essentially I want to know what makes more financial sense, overpaying your mortgage or shortening the over all term. For example and using simple figures for ease...

Say I have a choice between deciding to shorten my overall mortgage term from 30 to 25 years on a fixed term mortgage and doing so increases the fixed monthly payment by £500 pound OR I decide to keep my overall mortgage term at 30 years and overpay on my mortgage by £500 a month.

Now, if I overpay I have been told that all of the £500 would go towards reducing the capital and not paying off the interest. However if I shorten the term then some of the extra £500 a month would go towards paying off the capital and some towards paying off the interest.

So surely it would be beneficial to overpay and keep the same length term, as this will reduce the capital I owe quicker and ALL of my £500 will go towards this.

No one has been able to explain to me in a simple manner if this is correct or not, grateful if someone could do so....

Many thanks, 

K_S

@fisbister You can achieve the same savings by overpaying or reducing the term. But from a flexibility point of view, overpaying may be better.
https://blog.moneysavingexpert.com/2014/10/dont-shorten-your-mortgage-term-if-you-can-overpay/

getmore4less

All term does is set a payment.

There are only 3 variable to a mortgage. 

Amount borrowed. 
Interest rate. 
Payment. 

What you pay is what matters to determine the cost of running a mortgage. 

There are issues to do with ERC on fixed terms and max overpayment that can determine what you might want to pay. 

If your broker is struggling to explain get a new one. 

lonibra

You can reach the same end point, spending/saving same interest by making voluntary overpayments when compared to committing yourself to higher payments over a shorter term. I personally would rather have the flexibility of stopping overpayments if I need to or life events force me to.

dimbo61

Now for me the clever way to do this is taking out an offset mortgage !
So you take a normal term of 25/30 years and your commited to the regular payments But if you have any spare cash you build up funds in the offset account to reduce the Interest you pay each month and hence increase the Capital your paying each month.
You also have access to your Offset savings just in case a Pandemic or other life events happen !
Check in out 

IAMIAM

Martin has done an article on this. They effectively do the same thing. Without a doubt I tell EVERYONE. Keep term as long and overpay. You are in control if things hit the fan. Be it, covid, redundancy, divorce, death or illness. You want to be in control NOT the bank. Pick the term, be disciplined, and overpay 

IAMIAM

The problem with offset is the best rates are always practically double standard mortgage rates, shorter terms and you need a mega salary. I think only Barclays and Scottish Widdows have comparable rates, at 75% or below. All others are ridiculous interest rates on the remaining balance after offset, so there is no point. 

getmore4less

The good old days of offset and stoozing are over for most.

The deals are not easy to find at reasonable rates.

dimbo61

The poster has given No details about loan size, LTV or savings so we can only guess what deals either normal fixed/tracker or Offset they might get.
Yes it is good to overpay and save interest however you can't ask for your overpayments back once you have overpaid the mortgage.
Many posters on the Mortgage Free board use offset mortgages to good effect.
Your choice 

ukri

getmore4less said:

The good old days of offset and stoozing are over for most.

The deals are not easy to find at reasonable rates.

Absolutely right. There was a time when there where good offset deals to be had, not anymore.

 I am in the process of getting a mortgage and was interested in offsets (who wouldn’t be, it’s like having your cake and eating it too) but the premium you pay is a joke. 

My adviser says that everyone loves offsets until they see how much more they have to pay for the privilege.

Maybe that will change in the future but right now it’s a swindle.

K_S

Tbf, at low LTVs there are a few decent 5 year offsets in the market, I just did one with Coventry for an on/off cash-rich client a few weeks ago. But yes, crudely comparing interest rates, you can expect to pay roughly 0.75-1% more than the equivalent rate for a normal 5 year fix.