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Overpayments: Reduce balance, term, or monthly payments?

Adamnatsmith
Adamnatsmith Posts: 11 Forumite
Seventh Anniversary 10 Posts Combo Breaker
edited 18 August 2023 pm31 7:24PM in Mortgages & endowments
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!

Comments

  • Shorten the term and keep paying the same amount. I started with a twenty year term and paid it off in eight.
  • El_Torro
    El_Torro Posts: 1,715 Forumite
    Tenth Anniversary 1,000 Posts Name Dropper
    edited 18 August 2023 pm31 8:14PM
    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.
  • 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
  • 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
    dimbo61 Posts: 13,727 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    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 
  • 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
    Sistergold Posts: 2,107 Forumite
    Fifth Anniversary 1,000 Posts Name Dropper Photogenic
    edited 23 August 2023 am31 2:40AM
    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? 
    Initial mortgage bal £487.5k, current £258k, target £243,750(halfway!)
    Mortgage start date first week of July 2019,
    Mortgage term 23yrs(end of June 2042🙇🏽♀️), 
    Target is to pay it off in 10years(by 2030🥳). 
    MFW#10 (2022/23 mfw#34)(2021 mfw#47)(2020 mfw#136)
    £12K in 2021 #54 (in 2020 #148)
    MFiT-T6#27
    To save £100K in 48months start 01/07/2020 Achieved 30/05/2023 👯♀️
    Am a single mom of 4. 
    Do not wait to buy a property, Buy a property and wait. 🤓
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