The details of overpaying against balance or term

dpre

Hello everyone, celebrating 1 full year of mortgage here. Only 24 more to go! 

Hoping to get some clarity on the best way to overpay my mortgage. I've read several threads about this online, but everyone is on a slightly different situation, either on interest only mortgages (not me), or paying extra every month (not me), or due to remortgage (not me), or have been paying already for 15 years (not me). Also, you might need to be explained this stuff to me as if I was a small child or a golden retriever.

I bought a house a year ago for the monstrous amount of 645k. We were lucky enough to be able to put a deposit of £258k, so our loan was around £387k. We decided to pay that over 25 years. We started with a 5year mortgage @1.29% fixed rate with Platform (coop bank, which by the way I would not recommend).
Our monthly payments have been ~£1,510 for the past year.

Since we could overpay up to 10% (of the outstanding amount) without fees, we made a £15k overpayment a couple of months ago.

Now, Platform sent me a letter saying "great, thanks for the money, we reduced your balance to £358,780. Your monthly instalments are now £1450".

I was under the impression that a lump payment should have gone towards reducing the total amount, rather than saving very little on the monthly instalments (I understand now this is a common issue for mortgage noobs).
I talked to them on the phone, and someone from their team will be in touch and we'll discuss if I am eligible for a shorter term.

I guess reducing the balance and monthly payments does add up over the years, as £60 * 12months * 24years =  £17,280. Does this make sense? I don't think it does, since I might remortgage in a few years and a tiny difference in interest rate might impact payments more. On the other hand, that money has been counted towards my loan...?

Wouldn't it be better for those payments to stay the same, and just end my mortgage sooner & pay for fewer months/years? Surely the goal here for me must be to pay it off asap (provided I can afford to), unless I'm missing a trick. 

Which of the two solutions means that I'm paying less interests?

I have read all about the theory around not overpaying because in future you might sell the house etc, but this is not my case (also, I have already overpaid, I'm not asking for the money back).

jimjames

You need to speak to the lender to request that payments remain the same.

dpre

I guess what I'm asking is if that is the right move - and what is more effective for my mortgage?

BikingBud

See here:
Mortgage Overpaying

Play with the linked spreadsheets, set up "Mortgage 1" as your current arrangement and then play with the figures on "Mortgage 2", the term ie keeping the same payment to shorten the term, or reducing the monthly payment to keep the term the same, compare offset/savings against overpayment and set figures to see the benefit of hitting your max overpayment etc.

Perhaps best only consider what you can control so only focus on the term you currently have ie 5 years fixed at 1.29% as yo do not know what the rates may be in 5 years. You can then see what you have left after 5 years and maybe consider as you get close if you want to settle early to get a better rate, it may pay back over the next fixed period.

Once you understand the mechanics of the mortgage and the difference small changes can make you will be able to manage your finances far better, especially when dealing with the lender whose motivation is not the same as yours!  

K_S

@dpre To put it very simply, with respect to saving interest over the lifetime of the mortgage, you can achieve the same result by either of the following -

1. overpaying and keeping the term unchanged (monthly contractual payments go down)

2. overpaying and reducing the term (monthly contractual payments remain unchanged)

3. overpaying with no change in term or contractual monthly payments (some lenders will allow this, but only until the end of the current fix at which point it'll revert to one of the above).

If you want to absolutely maximise your penalty-free overpayments every year then you'll be able to overpay by a little more by keeping the monthly payments unchanged.

This blog from Martin touches upon the above topic so will hopefully help you make an informed choice.
https://blog.moneysavingexpert.com/2014/10/dont-shorten-your-mortgage-term-if-you-can-overpay/

dimbo61

The only problem with trying to reduce the term is that the lender may require a new affordability checks due to the larger monthly payments.
You can ask to keep your mortgage payment static IE continue paying the same monthly mortgage payment even if you pay ad hoc extra payments as and when you have the money.
You have a great rate so make sure your building up  MAX Pension contributions

BikingBud

dimbo61 said:

The only problem with trying to reduce the term is that the lender may require a new affordability checks due to the larger monthly payments.
You can ask to keep your mortgage payment static IE continue paying the same monthly mortgage payment even if you pay ad hoc extra payments as and when you have the money.
You have a great rate so make sure your building up  MAX Pension contributions

?

Not quite sure what you mean. If you overpay £100 or £1000 you are not committing to those payments regularly but as the capital has been reduced your term can be reduced, see 2 above in K_S' post.

Sistergold

Reducing term can be a hustle and it’s not so necessary in the grand scheme of things. If you can continue overpaying say 10% every year if you choose to after some years say 8yrs the balance will become so low you can then clear it off at say year 10. Basically you can reduce term without the discussions just simply due to the fact that it’s now paid up, zero balance. Nearer the time all you need is not to be fixing for too long this getting a deal with more flexibility.