Mortgage overpayment - questioning the key advice!

dizzyblonderach

Hi all,

We have a lump sum of money that we want to use to overpay our mortgage (there are no overpayment penalties). I know Martin gives the key message to always ask for overpayments to reduce the mortgage term rather than reduce monthly payments but was wondering if actually it could work out better financially to do the opposite. Here’s an example:
1) If we overpay £5000 and keep monthly payments the same (at close to the max we can comfortably afford, eg £900), this reduces our mortgage term, great.
2) If we overpay £5000 and ask for the monthly payments to be reduced, surely we’ve taken a chunk off the amount we owe (so reducing the interest that will be added), and our monthly payments will be less (let’s say £700 just as an eg), giving us space to overpay by a further £200 per month (in this eg), so further reducing the amount we owe. Our mortgage term stays the same, so if we stuck with that provider we’d pay more in the long term, BUT as we have many, many years left of this term, we will remortgage at some point, and when we come to do this, surely our total loan amount will be lower, meaning that at that point we can reduce our mortgage term if we wish…

I guess my question is, does it actually make a difference to the interest if we do option 1 or option 2, or would the fact that we’d be paying £900 each month in either scenario, after paying the lump sum, mean that we’re getting our loan amount down sooner, and reaping the same benefits?!

Sncjw

I'm sure there's calculators online that can show difference of both term and payments 

dimbo61

If you make an overpayment and ask to reduce the term many lenders consider this a change in your mortgage and make you do another mortgage assessment  !
If you just make a lump sum overpayment but keep the term the same you just pay a slightly  smaller mortgage payment each month  going forward.
On most fixed rate deals you are allowed to overpay by 10% of the mortgage balance each year

dizzyblonderach

Thanks for the feedback!

I asked this question of a mortgage broker today and got a really useful answer:
They said it’s worth reducing the mortgage term and keep going with monthly payments as high as you can comfortably manage. This then reduces the mortgage term straight off and gives more capacity for overpayments within any limit (eg 10%), if you happen to come into some money. Hope this is useful for anyone else who was wondering the same  as me!