Mortgage overpayment reduces monthly repayment amount.

Jayandclare

I have a 5yr fixed mortgage with Natwest at 4.02% I wish to overpay the maximum (20%) in this case. I'm told by the mortgage team this overpayment will reduce the monthly payment so that the mortgage term stays the same.

In a previous fixed term I also made maximum overpayments for 2 consecutive years and again the same result where my monthly repayment was reduced. When I challenged this again it was to keep the term the same.

My mortgage advisor has told me this isn't a great way to save.

Is this common or normal with some lenders, when they deny the chance to reduce the term?

I'm a higher rate tax payer so savings isn't going to beat the mortgage rate.

Thanks

QrizB

Jayandclare said:

I'm a higher rate tax payer so savings isn't going to beat the mortgage rate.

Pensions will, though, and ISAs will, and some non-tax-sheltered investments might.

How old are you?

Jayandclare

Thanks for the reply,

I'm 50, and used my ISA allowance and will do again in April. If I can get a rate higher than Mortgage its probably wise to do this. I'm just anticipating the ISA rate dropping lower though.

Veteransaver

Re your mortgage, the monthly repayments need to fall to keep the term the same because otherwise each monthly repayment after paying a chunk off the mortgage will include an element of overpayment too. As it's a fixed mortgage it's normal to do it this way. A non fixed mortgage will work differently as you can pay off as much as you want usually, and choose your own monthly payment if you want.
If you are a high rate taxpayer I would definitely say you should be far better off putting the overpayments into pensions, at least to use up your income at the high rate.
Income Tax is effectively an annual cost to you, you won't ever get It back!
You can also still beat 4.02% return on cash ISAs too, though those rates are falling. But you could possibly get a 5 year fix ISA which overall would return more than your mortgage rate.

Mark_d

Saving aren't going to beat your mortgage rate but the right investments can do so over the long term.  If you're very risk averse then mortgage overpayments are the way to go.

Overpayments on your mortgage mean that you're paying interest on a smaller amount.  It makes no difference whether the term is reduced or the monthly payment is reduced.  Personally I think it's better to reduce the monthly required payment.  This way you can see the effect of your overpayments - rather than having to wait until your mortgage is paid off.

Little_bit_taller

Even in Natwest's calculator you get 2 options i.e. pay off mortgage earlier or reduce monthly payments.

https://www.natwest.com/mortgages/mortgage-calculators/mortgage-overpayment-tool.html

Do you use the app? See what it says there about making an overpayment.

Let us know how you get on

Little_bit_taller

To add to the above...I am currently with Santander and make overpayments and they asked what option I would like. I just checked the app and my mortgage overpayments is set to "mortgage term reduction".

BikingBud

Mark_d said:

Saving aren't going to beat your mortgage rate but the right investments can do so over the long term.  If you're very risk averse then mortgage overpayments are the way to go.

Overpayments on your mortgage mean that you're paying interest on a smaller amount.  It makes no difference whether the term is reduced or the monthly payment is reduced.  Personally I think it's better to reduce the monthly required payment.  This way you can see the effect of your overpayments - rather than having to wait until your mortgage is paid off.

Are you sure?



10% annual overpayment at start of year seems to make around £33K difference on £400k @4.02% for life of loan which by adjusting the term brings it down from 25 years to 10.8 years! 

Maybe I'm missing something but keeping the payment the same, ie Option 2 is a clear winner. Option 1 is not to be sniffed at as it saves around £130k but that is still £33k behind reducing the term.

Other discussions about savings v investment v buying lottery tickets may all have some merit but overpaying and keeping payments same to reduce term vice reducing payment and keeping term the same wins for me. 

Newbie_John

@BikingBud what you are missing in calculation is what you do with money saved by paying less monthly. You can save it, and use to pay off your mortgage in full 5 years before the end. 

They can be literally the same.

BikingBud

Newbie_John said:

@BikingBud what you are missing in calculation is what you do with money saved by paying less monthly. You can save it, and use to pay off your mortgage in full 5 years before the end. 

They can be literally the same.

But is that an omission on the counter to the observation:

" It makes no difference whether the term is reduced or the monthly payment is reduced."

When it certainly appears to make a difference.

Jayandclare

Little_bit_taller said:

To add to the above...I am currently with Santander and make overpayments and they asked what option I would like. I just checked the app and my mortgage overpayments is set to "mortgage term reduction".

Thanks for the info, I checked on the Natwest App and it does say anything over £1000 will reduce the monthly payment. The calculator interest saving is good on the monthly overpayment as it will reduce the term but overpaying a lump sum by the maximum doesn't save much interest as the monthly payment is reduced. Even with a lower interest rate the ISA's will make more according to the calculator on Natwest.