Mortgage overpayments - use to reduce term or monthly payments

lizsheff

Hi everyone

My mortgage provider gives two types of mortgage overpayments. The automatic one reduces the term of the mortgage. But you can also ask to use it to decrease your monthly repayments. I am at the start of a 5 year fix, with a low interest rate (my first house). I'm conscious that interest rates and inflation are going up so when I remortgage in 5 years time I'm unlikely to get such a good mortgage deal, and my wages may not have gone up by much - so I am likely to face much higher repayments.

I am better to reduce the term with the overpayments, or try and reduce how much I need to pay over my current term to protect against rises? I am assuming the first is better long-term as it will reduce the interest payments more and I pay off quicker (and presumably I could remortgage and try and extend the mortgage term back if monthly payments are high), but I'm just so worried about inflation! So the second feels like it protects against that more.

Any thoughts appreciated!

Bigphil1474

It's difficult to predict what will happen in 5 years time. My reading is that interest rates will continue to rise in the short term at least as they try to strengthen the £ against the dollar (reduces import costs). If that happens and they get inflation down, then interest rates may stabilise, go down, or even go up. The main thing is to consider affordability in 5 years time. Do some calculations on higher interest rates and see if you could still afford the monthly mortgage payments. Then try if the loan amount is less (due to over paying).
Personally, I would overpay the mortgage to reduce the term unless I can get the money in some savings fund which pays a higher interest rate. We overpaid our mortgage which we took out about 20 years ago on a good fix, in case we couldn't get another good deal. Turns out interest rates went down after the initial fix, so we carried on overpaying and ended up paying the mortgage off about 6 years early. 

redundantmortgage

It depends on how much you've got left and how much you can afford to overpay. 

If your overpayment limit is far more than you can afford then reducing monthly payments makes more sense because you'll still be paying the same with the difference being the amount you have to pay will get smaller over time.

If you can afford to over pay by much more than your limit then reducing the term may be a better option because the gap between what you can overpay vs what you can afford will get wider. That said, if you're near the end of your mortgage then you shouldn't be paying too much interest so you're probably best off saving the excess money and pay off once you can without penalties.

Our overpayment limit is the initial balance which helps. The amount we have to pay each month now is far less than what we had to when we first started. This was handy when I was made redundant and out of work for a period. Now I have more in my savings than we owe on the mortgage and the mortgage has 5 years left, but when our deal ends at the end of the month we're going to pay off the balance. So whilst we haven't officially reduced the term we will have in reality once we make that payment.