increasing mortgage term with a plan to overpay

wstaa

hi all, I'm wondering if the scenario I'll outline below makes sense - any input would be appreciated.

Current mortgage:
Outstanding balance £290k
mortgage fixed rate - 2.09%, ends in Nov 2023
Remaining mortgage term - 18 years
current monthly payment £1604

New mortgage
rate 5.74% - 2 year deal 
mortgage term - 18 years
new monthly payment £2154

Total repayment (based on the MSE mortgage overpayment calculator): £465,690

The new monthly payments are roughly £550 higher than the current ones, but we're financially stable so although the increase is very unwelcome it won't be a huge pain. It will however mean that we will struggle with making any overpayments in the near future which we were hoping to do (we've been making overpayments in the past year into a savings account and plan to make a lump payment into mortgage account once the savings account matures).

assuming that bank agrees to increase mortgage term to 25 year, the monthly payments go down and we overpay every month (let's say £600 per month which will still be within the 10% overpayment limit we are able to do) - the total repayment value seems to be lower at 435,880 (again based on the mortgage overpayment calculator). 

I understand that increasing mortgage terms is more expensive, but it seems that by doing that and overpaying every month we have more chances of clearing the mortgage sooner than by keeping current term and not overpaying. 

Thanks

ACG

- You are comparing overpaying £600 with repayments of £550. 
- Also I assume you are presumably comparing 5.74% for the full 18/25 years compared to 5.74% for 2 years and then the SVR for the remainer? 
- Potentially another reason for the difference could be down to the calculator, is it a daily interest calculator or a monthly/annual interest calculator? 

Theoretically if you overpay to the same tune as what the repayments would be, the amount repaid should be identical. But I think the second point is where the bulk of the difference lies. 

jlfrs01

Did you use the £600 overpayment for both calculations because the monthly repayment amounts will be smaller on the 25 year deal so the corresponding overpayments will be different (lower on the 25 year one, higher on the 18 year one). 

wstaa

here are the scenarios I've been trying to compare with a few additional details I was able to find out

mortgage 1
rate 5.74% - 2 year deal (but assuming the same rate for teh rest of term to simplify)
mortgage term - 18 years
new monthly payment £2154
no overpayments
total monthly cost £2154

Total repayment (based on the MSE mortgage overpayment calculator): £465,690

vs

mortgage 2
rate 5.74% - 2 year deal (but assuming the same rate for teh rest of term to simplify)
mortgage term - 25 years
new monthly payment £1,819.94 (according to TSB calculator)
overpayments - for this exercise I'm assuming we will overpay the difference of £2154 - £1,819.94 = £334
total monthly cost = £2153.94

Total repayment (based on the MSE mortgage overpayment calculator): £465,660

My conclusions so far:
- based on wanting to keep monthly payments at a similar level, then shorter term + no overpayments vs longer term and overpayments give roughly the same results 
- the only benefit of longer term + overpayments is flexibility to reduce overpayments if needed (but that will make this scenario more costly long term)

It seems that longer term + overpayments scenario will reduce overall mortgage cost only if overpayments are more than difference in the two scenarios above (which obviously makes sense - by paying more monthly the overall cost goes down).

fergie_

There are several factors playing out here. First of all with UK mortgages, you pay off more interest and less capital at the start and this gradually reverses over the term.

You are currently paying the capital at a rate that will clear it in 18y, with a small amount of interest. The interest is the amount increasing - not the capital.

If you reset to 25y, you are still paying the same interest (and likely more over time), but paying off less capital - in affect taking 7 extra years to clear it.

The main benefit of replacing fixed payments with overpayments is flexibility. Like wise, if the money could work harder elsewhere. There is an argument that by making the overpayments the payments go straight against the capital - rather than the front loaded interest I mentioned earlier, but it is all much of a muchness unless you have a plan to clear it at a faster rate or need the head room.

ACG

If the rate is the same throughout and you pay the same throughout, the overall amount paid is the same. The £30 difference you have over 18-25 years will just be down to rounding.

Which is pretty much as expected. 

BikingBud

As ACG said. Here is a snapshot from a spreadsheet Mortgage term remains the same, Mortgage 2 shows the adjustments, £334 per month overpay, the £81k is the figure you save against allowing the 25 year plan to run:



Opting for 25 years gives a base monthly lower payment and perhaps some flexibility but you are countering this immediately by overpaying hence the outcome is the same, 18 years to repay and same amount of interest give or take £30ish.

With £600 per month overpay saves ~£33.5k and over 3 years:


By aggressively overpaying 10% in Jan every year, that would be about £146k total, you would save £100k in interest over the 18 year option and £181k over the 25 year without overpay and allow you to be mortgage free after ~ 10 years:



There is likely a middle ground that is affordable and worthwhile eg 5%:



You may also wish to consider how much you could save and at what rate as this might also be an option to explore.

Try for yourself calcs here: http://www.locostfireblade.co.uk/spreadsheet/Index.html

wstaa

thank you all for your input. I think we will keep the 18 years term and try to continue making overpayments.

Thank you for the link to the calcs!