Mortgage overpayment reduces monthly repayment amount.

Veteransaver

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".

Is yours a fixed rate mortgage though?

Jayandclare

Using the Natwest Overpayment Calculator there is a big difference in interest saved when reducing the term compared to reducing the monthly payment. Unfortunately they have informed me if I overpay a lump sum they will reduce the monthly repayment, therefore reducing the effect of an overpayment. I think I will put my money elsewhere and use that in 4 years time when my fixed term ends to pay off. Something to watch out for all readers though is Natwest rates might have been good but overpaying wont really save as much when compared to other lenders. Luckily the redemption percentage is low in the final 2 years so that is another option.

Hoenir

Overpaying in the fixed term period may incur Early Repayment Charges. Worth checking the small print carefully. 

Newbie_John

BikingBud said:

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.

They're different but can lead to the same outcome. Even short term, if you have mortgage £100k and overpay £20k for next year you will pay the interest on £80k.

Let's consider 3 scenarios on £100k mortgage for 10 years at 5%:
1) we overpay and reduce term
2) we overpay and reduce monthly payments, putting the monthly difference to 5% saving account
3) we don't overpay and save all into 5% saving account

If we manage to save enough after 5 years to pay off the mortgage in full then all these three scenarios would work out the same way (in option 2 and 3 we pay the mortgage in full after 5 years).

Jayandclare

BikingBud said:

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. 

Yes I agree and thanks for showing in the Excel Doc. Its pretty much what the overpayment calculator has suggested, obviously with different figures but these comments are all a great help, Thank You!

jrawle

Jayandclare said:

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. 

For anyone who is interested, the relevant sentence can be read on this page:

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

Lump-sum overpayment           

[...]

• If you pay £1,000 or more, your monthly payment will be recalculated.

It doesn't say £1000 per month or in total, just a lump sum of £1000 or more. What would happen if you made multiple payments of £999? Nationwide have a similar rule, except the figure is £500, but I believe you can make as many payments under £500 as you want (as long as you don't exceed your overpayment allowance) and they won't change the automatic monthly payment. At one point, I used to pay £490 per month with Nationwide, and they didn't recalculate it. I'm fairly certain I could have made multiple payments in the same month and it wouldn't have made any difference. Something to think about!

Veteransaver

Jayandclare said:

Using the Natwest Overpayment Calculator there is a big difference in interest saved when reducing the term compared to reducing the monthly payment. Unfortunately they have informed me if I overpay a lump sum they will reduce the monthly repayment, therefore reducing the effect of an overpayment. I think I will put my money elsewhere and use that in 4 years time when my fixed term ends to pay off. Something to watch out for all readers though is Natwest rates might have been good but overpaying wont really save as much when compared to other lenders. Luckily the redemption percentage is low in the final 2 years so that is another option.

How many years are left on your mortgage? Not the number of years till the fix ends, until it is repaid?
Also I don't think you are fully accounting for the additional amount you will have each month from a reduced monthly payment, which you can earn a return on, or save to redeem a bigger chunk off your mortgage when the fix term ends.
Eg Paying £20k off now will save you a lot more interest overall than paying off an additional £20k spread over x number of months / years.

BikingBud

Newbie_John said:

BikingBud said:

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.

They're different but can lead to the same outcome. Even short term, if you have mortgage £100k and overpay £20k for next year you will pay the interest on £80k.

Let's consider 3 scenarios on £100k mortgage for 10 years at 5%:
1) we overpay and reduce term
2) we overpay and reduce monthly payments, putting the monthly difference to 5% saving account
3) we don't overpay and save all into 5% saving account

If we manage to save enough after 5 years to pay off the mortgage in full then all these three scenarios would work out the same way (in option 2 and 3 we pay the mortgage in full after 5 years).

Yes of course with a changed scenario you will get a different outcome. But the scenarios as presented were:

1 - Overpay and reduce term
4 - Overpay and reduce monthly payment

We can add many other differing scenarios if you want and also throw in how personal circumstances and risk appetite may shape the decision but none of them will change the fact that 1 is better than 4.

Newbie_John

BikingBud said:

Newbie_John said:

BikingBud said:

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.

They're different but can lead to the same outcome. Even short term, if you have mortgage £100k and overpay £20k for next year you will pay the interest on £80k.

Let's consider 3 scenarios on £100k mortgage for 10 years at 5%:
1) we overpay and reduce term
2) we overpay and reduce monthly payments, putting the monthly difference to 5% saving account
3) we don't overpay and save all into 5% saving account

If we manage to save enough after 5 years to pay off the mortgage in full then all these three scenarios would work out the same way (in option 2 and 3 we pay the mortgage in full after 5 years).

Yes of course with a changed scenario you will get a different outcome. But the scenarios as presented were:

1 - Overpay and reduce term
4 - Overpay and reduce monthly payment

We can add many other differing scenarios if you want and also throw in how personal circumstances and risk appetite may shape the decision but none of them will change the fact that 1 is better than 4.

No, it's not better.

You don't know what the rates will be in the future - if savings rates are higher than mortgage rates then it's better to save. If mortgage rates are higher than savings rate than it's better to ovepay the mortgage.

Overpayments with reduced monthly payments - offer something inbetween - you pay less interest on your mortgage and get access to more cash if ever needed. Hence you're taking less risk by not betting on just one outcome.

There is really too many factors to consider to give a simple answer A is better than B:
- unknown interest rates in the next 20 years
- personal needs for larger amount of cash (saving allows for easy access with no need to remortgage which can be costly or taking expensive loan).
- what if someone reduces term and then their monthly payments become too expensive (rate goes up a lot) forcing them to sell, remortgage, borrow more elsewhere?

Riskwise, the best things to do is to:
- save and not overpay, then
- overpay and reduce monthly, then
- overpay and reduce length 

One thing for sure - which is common to all options here - is that saving money is most beneficial - whichever way we do it - saving accounts / different types of overpayment - could work out differently and we don't know what's best.

Jayandclare

jrawle said:

Jayandclare said:

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. 

For anyone who is interested, the relevant sentence can be read on this page:

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

Lump-sum overpayment           

[...]

• If you pay £1,000 or more, your monthly payment will be recalculated.

It doesn't say £1000 per month or in total, just a lump sum of £1000 or more. What would happen if you made multiple payments of £999? Nationwide have a similar rule, except the figure is £500, but I believe you can make as many payments under £500 as you want (as long as you don't exceed your overpayment allowance) and they won't change the automatic monthly payment. At one point, I used to pay £490 per month with Nationwide, and they didn't recalculate it. I'm fairly certain I could have made multiple payments in the same month and it wouldn't have made any difference. Something to think about!

Thats a very good point, I maybe be able to keep putting amounts down under £1000 within my allowance. I will contact Natwest and check this one, Maybe even a combination of the lump sums and overpayments via DD. Thanks for this!