Are all mortgage overpayments the same?

Mitchman81

Hello, I've tried my best to find this information elsewhere but have had no luck!

Basically I would like to make overpayments on my mortgage but I'm unsure if it's worth it. I heard Martin Lewis talk about overpayments on the Radio 5 Live podcast and he said it's only worth doing them if they decrease your mortgage term.

My mortgage is with Halifax and although they will allow me to overpay up to 10% each year, the overpayments do not decrease the term (for reference I have 24 years remaining). Instead they will use the reduced balance to recalculate the monthly payment.

I know that I will only "break even" if I carry on making these minimum monthly payments because they will have taken my overpayments into account to arrive at the new monthly figure. But is there a difference between using overpayments to reduce your term and manually making overpayments over and above the minimum recalculated monthly figure up to a certain figure instead?

If I'm not being very clear, perhaps an example would help to explain:

If my current minimum monthly payment was £400 per month and I decided to make an additional monthly overpayment of £100 per month. Then, in the following year, due to all my previous overpayments, my minimum monthly payment was recalculated to be £390. If I then make overpayments of £110 to maintain a £500 overall monthly payment, will this effectively be reducing the term of the mortgage over time?

Apologies if I haven't made this very clear! If anyone could let me know how this all works (preferably with a small example!) I would very much appreciate it. Thank you.

400ixl

This may be an alternative way of doing it depending on your mortgage rate. Pay the money into a savings account which may now allow you to match or beat your mortgage rate, then pay off the mortgage capital once a year.

What you have suggested will also work though, obviously you will hit a pivot point where that 10% limit is lower than the over payment amount you can do. But you may well have re-mortgaged by then.

K_S

Mitchman81 said:

Hello, I've tried my best to find this information elsewhere but have had no luck!

Basically I would like to make overpayments on my mortgage but I'm unsure if it's worth it. I heard Martin Lewis talk about overpayments on the Radio 5 Live podcast and he said it's only worth doing them if they decrease your mortgage term.

@mitchman81 You may have misheard/misunderstood the part in bold. This article (with an example) will explain it better than I can
https://blog.moneysavingexpert.com/2014/10/dont-shorten-your-mortgage-term-if-you-can-overpay/

Essentially, overpaying has the same impact as shortening the mortgage term, but with the advantage that you can stop making overpayments at any point if you want or need to.

Ultrasonic

K_S said:

Mitchman81 said:

Hello, I've tried my best to find this information elsewhere but have had no luck!

Basically I would like to make overpayments on my mortgage but I'm unsure if it's worth it. I heard Martin Lewis talk about overpayments on the Radio 5 Live podcast and he said it's only worth doing them if they decrease your mortgage term.

@mitchman81 You may have misheard/misunderstood the part in bold. This article (with an example) will explain it better than I can
https://blog.moneysavingexpert.com/2014/10/dont-shorten-your-mortgage-term-if-you-can-overpay/

Essentially, overpaying has the same impact as shortening the mortgage term, but with the advantage that you can stop making overpayments at any point if you want or need to.

I think you may have misunderstood the OP there? The final sentence of the 'PS' of your link basically states exactly what the OP was saying they were also trying to avoid. If overpayments don't reduce the monthly payments then they must surely act to reduce the term?

Ultrasonic

I think this slightly more recent article basically states what the OP referred to having heard ML say (and what I thought was the normal advice which is why I checked.

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

K_S

@ultrasonic It's definitely a possibility that I've misunderstood the original post  

With regard to the impact of overpayments, some lenders will neither change the term nor adjust the contractual monthly payment, they'll keep both the same until the end of the current product or until the customer requests a review.

Even so, the borrower will still gain the benefit of making overpayments as the interest portion of the monthly payment will get smaller so they still save on interest.

Ultrasonic

K_S said:

Even so, the borrower will still gain the benefit of making overpayments as the interest portion of the monthly payment will get smaller so they still save on interest.

Not sure if you saw my second post but I'm left wondering why ML so clearly advises that people should not let overpayments reduce the mandatory monthly payments, but rather to act to reduce the term (paragraphs 10 and 11)?  

K_S

@Ultrasonic If it's these two paras below that you're referring to, I would interpret that (in the context of the rest of the article) as saying that either ask the lender to keep the payment the same or increase the size of your regular overpayments to continue to pay the same amount.

Ultrasonic

K_S said:

@Ultrasonic If it's these two paras below that you're referring to, I would interpret that (in the context of the rest of the article) as saying that either ask the lender to keep the payment the same or increase the size of your regular overpayments to continue to pay the same amount.

It was. Respectfully I'm not convinced your interpretation was what was meant to be honest, since both paragraphs refer to keeping the term fixed being something undesirable and requiring mitigation, and with no suggesting of trying to avoid the term being reduced. You may well of course have a different view to ML though.

My quick thoughts on your suggestion are that the former may not be possible and that the latter will require a change every month and could be limited by the 10% overpayment fee-free overpayment limit. I'm saying this as the overpayment definition is likely that above the mandatory monthly payment. As such, choosing for overpayments to reduce the term may enable a greater overall fee-free overpayment for the year, although it doesn't sound like this will be an issue for the OP.

K_S

Ultrasonic said:

K_S said:

@Ultrasonic If it's these two paras below that you're referring to, I would interpret that (in the context of the rest of the article) as saying that either ask the lender to keep the payment the same or increase the size of your regular overpayments to continue to pay the same amount.

It was. Respectfully I'm not convinced your interpretation was what was meant to be honest, since both paragraphs refer to keeping the term fixed being something undesirable and requiring mitigation, and with no suggesting of trying to avoid the term being reduced. You may well of course have a different view to ML though.

My quick thoughts on your suggestion are that the former may not be possible and that the latter will require a change every month and could be limited by the 10% overpayment fee-free overpayment limit. I'm saying this as the overpayment definition is likely that above the mandatory monthly payment. As such, choosing for overpayments to reduce the term may enable a greater overall fee-free overpayment for the year, although it doesn't sound like this will be an issue for the OP.

@ultrasonic It's entirely possible that I'm wrong, but from everything I've read and heard from Martin Lewis on this subject, I understand him to be suggesting that -
- borrowers use the power of overpayments to reduce the amount of interest paid
- that overpaying has the same impact as reducing the term when it comes to saving you interest paid
- to keep the power of flexibility in your hand by using overpayments to achieve your aim without reducing the term

And I entirely agree with all three of the above points. In fact I even use Martin's articles (the two referred to above in this thread) on this subject to help make this point to some of my clients who can be fixated on taking out a mortgage with the minimum term possible, lumbering them with a contractual monthly payment that is much larger than it could be. In conjunction with the 10% fee-free overpayment limit (available with most products), it helps me demonstrate that they can achieve the exact same interest savings by simply setting up a standing order to voluntarily top-up their monthly payment and stop it whenever they want to or need to.

As you can imagine, they are far more likely to trust something Martin Lewis says than when it comes from a mortgage broker

With regard to keeping the payment and term the same (until the end of the product or the customer asks for a review), off of the top of my head it's possible with Nationwide, Halifax, TSB, so I'm pretty sure there are other mainstream lenders as well which will allow you to do that.

Ultrasonic

K_S said:

Ultrasonic said:

K_S said:

@Ultrasonic If it's these two paras below that you're referring to, I would interpret that (in the context of the rest of the article) as saying that either ask the lender to keep the payment the same or increase the size of your regular overpayments to continue to pay the same amount.

It was. Respectfully I'm not convinced your interpretation was what was meant to be honest, since both paragraphs refer to keeping the term fixed being something undesirable and requiring mitigation, and with no suggesting of trying to avoid the term being reduced. You may well of course have a different view to ML though.

My quick thoughts on your suggestion are that the former may not be possible and that the latter will require a change every month and could be limited by the 10% overpayment fee-free overpayment limit. I'm saying this as the overpayment definition is likely that above the mandatory monthly payment. As such, choosing for overpayments to reduce the term may enable a greater overall fee-free overpayment for the year, although it doesn't sound like this will be an issue for the OP.

@ultrasonic It's entirely possible that I'm wrong, but from everything I've read and heard from Martin Lewis on this subject, I understand him to be suggesting that -
- borrowers use the power of overpayments to reduce the amount of interest paid
- that overpaying has the same impact as reducing the term when it comes to saving you interest paid
- to keep the power of flexibility in your hand by using overpayments to achieve your aim without reducing the term

And I entirely agree with all three of the above points. In fact I even use Martin's articles (the two referred to above in this thread) on this subject to help make this point to some of my clients who can be fixated on taking out a mortgage with the minimum term possible, lumbering them with a contractual monthly payment that is much larger than it could be. In conjunction with the 10% fee-free overpayment limit (available with most products), it helps me demonstrate that they can achieve the exact same interest savings by simply setting up a standing order to voluntarily top-up their monthly payment and stop it whenever they want to or need to.

As you can imagine, they are far more likely to trust something Martin Lewis says than when it comes from a mortgage broker

With regard to keeping the payment and term the same (until the end of the product or the customer asks for a review), off of the top of my head it's possible with Nationwide, Halifax, TSB, so I'm pretty sure there are other mainstream lenders as well which will allow you to do that.

On the point in bold, we're talking about overpaying an existing mortgage that leads to a reduction in the term but the same mandatory monthly payments, as distinct from taking out a new mortgage with a shortened term and thereby committing to higher mandatory monthly payments. ML is definitely against the latter for the reason's you've expressed, and I think this is the key point of the two articles we've discussed.