Overpay Vs Reduce Term - the maths, are they the same? (HSBC won't allow reduce term)
I'm confused by some of the wording in an article on this site but I'm not allowed to post links, so it's called "Should I overpay my mortgage? It's a question of whether you save, or whether you overpay your mortgage" last updated in July, by Martin and Team
"When you make an overpayment, your lender may offer you two options:
- Either to reduce next month's payment by the amount you've overpaid, or
- To keep payments the same and reduce your mortgage term instead.
This is something to watch for – if you get it wrong, it means your overpayment won't actually help you out that much. If you get this choice always, always tell your lender you want to reduce the term of your mortgage.
If your overpayment goes to reduce next month's payment, it just means you're paying slightly early, so you save a few days' interest, but not much. You'd still repay almost as much as you would sticking to contractual payments, and – crucially – you won't have reduced your mortgage term.
Be very clear that you want all future overpayments to reduce the term of your mortgage. Once you've agreed this, you can usually make overpayments through online banking by setting your mortgage account up as a new payee, then making payments as and when you wish. Or, if you want to overpay the same amount every month, you can set up a standing order."So that seems a very clear case for having the overpayment reduce the mortgage term....yet moments later in the article it says this:
"Decreasing the term sounds sensible, and does almost exactly the same job that overpaying does – both mean you pay more each month, you pay less interest, and your mortgage is paid off sooner."
So first part makes it sound like all the benefit is with making sure they reduce your term and if you don't you're actually doing it wrong - then the 2nd part says it's basically the same....so which is it?!
Can someone explain the mathematical difference please? I have no other debts, my mortgage % is higher than I can get on my savings, I can pay off a lump sum and still keep enough back for a safety net, I'm already at less than 50% LTV so can't move into a better bracket, unlimited overpayments allowed, no ERC etc. etc. so it's really about maximizing the impact of overpayments.
I read on the HSBC website that overpayments default to reducing the term of the mortgage, I made a £10k overpayment and to my surprise found my next mortgage payment was less. Spoke to them and they said as I was on a lifetime tracker it's calculated daily and they just change the interest on the amount left and keep the term the same (have 19 years left), and every time the base rate changes they recalculate over the same remaining term - I cannot reduce the term.
I have another £40k I can chuck at it as well as monthly overpayments going forward but I'm wary now that maybe I'm not understanding some fundamental maths that I thought I did (as I used the MSE overpayment calcs). Surely if I keep overpaying I'm reducing the term because I'm clearing the capital debt, and it will just end up silly with £100 left with interest calculated over the remaining 15 years by that point...and then I'll just clear the balance and it will end. Or is there some interest effect I'm missing? Sorry I thought this was simple but I've ended up doubting myself - would appreciate some advice from clearer mind than mine! TIA
- All Categories
- 338.9K Banking & Borrowing
- 248.7K Reduce Debt & Boost Income
- 447.6K Spending & Discounts
- 230.8K Work, Benefits & Business
- 600.9K Mortgages, Homes & Bills
- 171.1K Life & Family
- 244K Travel & Transport
- 1.5M Hobbies & Leisure
- 15.9K Discuss & Feedback
- 15.1K Coronavirus Support Boards