Overpayments: Reduce balance, term, or monthly payments?

Adamnatsmith

I am hoping someone can help me understand what is the best way to overpay your mortgage - to shorten the term, reduce the monthly payments, or simply reduce the balance?

To give some context, we have £155,000 borrowed from Skipton on a tracker, currently at 6.2%, up for renewal in June 2024. The mortgage permits unlimited overpayments. We pay about £1,020 p.m. and are fortunate to be able to overpay by £600 p.m. The size of this OP means that it does not affect our monthly payments and it simply comes off the balance.

We are planning to upsize in the next two or three years so the point of overpaying for us is to reduce the amount we may need to borrow when we come to move. I am not interested in reduce our monthly payments and am comfortable with the length of the term as things stand. So this seems to fit our circumstances well, but...are we missing something? Is there a better way to do the overpayments that suits our longer term plans?

Thanks in advance to anyone who can help me understand!

Reddleman79

Shorten the term and keep paying the same amount. I started with a twenty year term and paid it off in eight.

El_Torro

Based on what you've said it looks like it makes sense to reduce the term, rather than reduce the monthly payments. This way some of the £1,020 you pay every month will include a (small) overpayment anyway, so if your goal is to reduce the amount you have to borrow in the future this is the way to go. 

By the way, you have mentioned 3 options: shorten the term, reduce the monthly payments or reduce the balance. You want to focus on the first 2 options, reducing the balance happens whenever you make an overpayment anyway. 

Since you can make unlimited overpayments it doesn't really matter what you choose. Even if you reduce the monthly payments instead of reducing the term you can still put any spare cash into the mortgage, if that's your goal.

It's worth noting that it's possible to get 7% return in a regular savings account. Assuming you don't pay tax on the interest there is a small advantage in doing this, since 7% is higher than your 6.2% mortgage. You can always put the money you put into your regular saver into the mortgage when the regular saver ends.

amanda1024

Making regular overpayments gives you more flexibility - if you couldn't afford to overpay one month that wouldn't be an issue. Whereas if you decrease the term that commits you to the higher payments

housebuyer143

Leave it alone. Being able to pay less in hard times is a valuable option. Just keep overpaying and then make changes when you come to remortgage.

dimbo61

If you ask to reduce the term then your lender has to do a new affordability  assessment on you.
Your right to just overpay every month as this overpayment comes straight off the balance each month.
This has exactly the same effect as reducing the term.
When you look to move and apply for a bigger  mortgage you can prove you have been paying a larger mortgage payment  each and every month for the last 2/3 years !
You will have a smaller outstanding  debt, bigger deposit and history of paying a big mortgage each month.
Lenders like that 

IdrisJazz

dimbo61 said:

If you ask to reduce the term then your lender has to do a new affordability  assessment on you.
Your right to just overpay every month as this overpayment comes straight off the balance each month.
This has exactly the same effect as reducing the term.
When you look to move and apply for a bigger  mortgage you can prove you have been paying a larger mortgage payment  each and every month for the last 2/3 years !
You will have a smaller outstanding  debt, bigger deposit and history of paying a big mortgage each month.
Lenders like that 

Exactly this.

Don't ask your lender to reduce the term - you don't need to. By reducing your debt more quickly, you will of course reach the zero point sooner.

Sistergold

dimbo61 said:

If you ask to reduce the term then your lender has to do a new affordability  assessment on you.
Your right to just overpay every month as this overpayment comes straight off the balance each month.
This has exactly the same effect as reducing the term.
When you look to move and apply for a bigger  mortgage you can prove you have been paying a larger mortgage payment  each and every month for the last 2/3 years !
You will have a smaller outstanding  debt, bigger deposit and history of paying a big mortgage each month.
Lenders like that 

If you do an OP and ask lender to keep the same monthly payment amount thereby reducing the term, this will not make the lender do a new affordability assessment, or so I thought? Every time I have made an overpayment of over £1000 they ask me if it is to reduce monthly payment or keep monthly payment the same that is reducing term. I always choose and never have I had to be reassessed for affordability?