Overpayment - reducing monthly repayment Vs reducing term

Eambo

Hi folks, good afternoon! I'm hoping someone with a more mathematically focused brain can help me out here! :-)

I have a mortgage of 80,000 remaining at a fixed rate of 1.8%, and am making a 10% overpayment as a lump sum.

By default, this reduces my monthly payments. We will be remortgaging next year after our fixed rate is up.

Is it better to:

- reduce the term

- reduce the monthly repayments

In the short term (1 year) which of these provides the best benefit to us? What are the pros and cons of each?

Thank you for any thoughts and guidance you can offer, I'm struggling to get my head around which of these is better, and whether one of them offers no benefit at all?

powerspowers

Which is most use to you, having more cash for the next year or knocking time off the end of the mortgage? 

If you’ve spent everything you had on raising the OP, I’d put it back in savings- bearing in mind that everything is getting more expensive. 

If you’ve got a good cushion, you could reduce the term and pay less interest overall as you are paying back faster. 

Eambo

powerspowers said:

Which is most use to you, having more cash for the next year or knocking time off the end of the mortgage? 

If you’ve spent everything you had on raising the OP, I’d put it back in savings- bearing in mind that everything is getting more expensive. 

If you’ve got a good cushion, you could reduce the term and pay less interest overall as you are paying back faster. 

Thank you for your response! Honestly probably the cash on hand, but I could do either. I wasn't sure if reducing the term was VASTLY better for the next year, or it's a bit of "6 of one half a dozen for the other" at the moment.

Cornish_mum

If you are going to have to risk taking on a debt (for example putting a big unexpected bill on a cc for a couple of months) because you don’t have an EF I would suggest giving yourself some wiggle room by reducing the payment and then if you don’t need it you can over pay as you go and won’t lose out. But I also prefer security and wiggle room and others prefer to push themselves to over pay and just do without if needs be. 

Also we are starting to think about purchasing things we need ahead to try and hedge inflation. Our mortgage is interest rate is low and fixed for 5 years so if inflation carries on like it is currently the real value of our debt is going to erode significantly (reverse compounding).  Alas as we work in public service so will our income and cash savings so using current purchasing power wisely is particularly important for us. 

Best of luck CM

powerspowers

That’s a good point CM