Overpaying when planning to redeem soon 26 February at 11:44AM in Mortgage-Free Wannabe 4 replies 116 views

7sefton

Hi everyone

I’ve got a variable rate discount mortgage deal that still has 8 months to go before reverting to the SVR. I’m allowed 10% ERC-free annual overpayments, but a 0.5% ERC for any more.

I am selling the property and have a buyer lined up, likely to complete in May. 

To reduce the eventual ERC, I am planning to make a 10% overpayment now. However I’m not sure to ask for the term to the shortened or monthly payments reduced. Probably a simple thing but I can’t get my head around which would be better. 

Any help appreciated!

Sistergold

If you are very comfortable with your monthly payments that is you do not wish them to be any lower then ask for them to reduce the term. If on the other hand you feel if you were to be in financial difficulty or if interest rates should go up that higher payments in future will cause some distress then ask to reduce monthly payment and keep term the same. So far for any overpayments I make I reduce my monthly payment and keep term the same. I know this does not give me maximum savings on future interest but I am future proofing my desired payment. This is because if ever mortgage rates should sky rocket I hope I can cope with the monthly payment going up for a long time. Was paying £2200 at start and now paying £1955. My hope being that if anything happens and interest rates go up hopefully it will still be £2200 or less. I really don’t want it to ever become £3500 for instance so will keep pushing it down. 

There are people on this forum who have witnessed and payed interest rates of 15%, we hope it never comes to that but in the meantime if it ever does I don’t want to ever struggle to pay it. 

Anyway good that you are overpaying and good luck with it all. You say you are selling, are you not buying again? 

Sky_

If you ask for the term to be reduced, then your contractual payments will increase, which will mean that you've paid off a little more when you complete on your sale.  This in turn will mean that your ERC is a little less. 

On the other hand, if you reduce the payments/keep the term the same, you'll have paid off a little less at point of sale, so will have a slightly higher ERC to pay.

There probably isn't much in it, but every little helps, especially when paying for a house move and associated costs.

7sefton

Sky_ said:

If you ask for the term to be reduced, then your contractual payments will increase, which will mean that you've paid off a little more when you complete on your sale.  This in turn will mean that your ERC is a little less. 

On the other hand, if you reduce the payments/keep the term the same, you'll have paid off a little less at point of sale, so will have a slightly higher ERC to pay.

There probably isn't much in it, but every little helps, especially when paying for a house move and associated costs.

Sorry I’m confused (my fault!): which option is better financially?

Sky_

7sefton said:

Sky_ said:

If you ask for the term to be reduced, then your contractual payments will increase, which will mean that you've paid off a little more when you complete on your sale.  This in turn will mean that your ERC is a little less. 

On the other hand, if you reduce the payments/keep the term the same, you'll have paid off a little less at point of sale, so will have a slightly higher ERC to pay.

There probably isn't much in it, but every little helps, especially when paying for a house move and associated costs.

Sorry I’m confused (my fault!): which option is better financially?

Reduce the term because then your ERC will be slightly smaller.