Mortgage overpayment reduces monthly repayment amount.

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  • Jayandclare
    Jayandclare Posts: 9 Forumite
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    @Veteransaver I have 10 years and 8 months, but will be paying off during and at the end of the fixed term (I have 4 years and 7 months left). One of the reasons I put this question out has made me realise there are so many options and further questions, and lots of different ways. I feel when using the overpayment calculator the lumpsum/reducing monthly payments is a very poor saving compared to keeping the same payments, its a shame Natwest dont allow this.
  • BikingBud
    BikingBud Posts: 1,729 Forumite
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    BikingBud said:
    BikingBud 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.
    I know there are too many factors to consider and that it why i have added the comment about differing scenarios but the simple statement was that:

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

    which cannot be supported mathematically. Hence without introducing any caveats, caveats that were not in the statement, total amount payable, it costs you less in the long run, Option 1 is better than 4.

    Unless you can show me the maths to indicate otherwise.

    That was the extent of the discussion.

    Mortgage: £200,000 (Sep 2021)                                      Initial MF date: Sep 2031 

    Int Rate:
    1.19% fixed until Nov 2026 (8.5% follow on rate?)
    Cap+Int Repaid: £65100 (32%)  £80,704 (40%) £82468 (40.48%)£89507 (43%) £91267 (44.7%) £98,309 (48.02%)

    Target MF date: Nov 2026  Current MF date: Dec 2029,  Nov 2029, Apr 2029, May 2029                                    
    Target Int Saving: £25,561 Current Int Saved: £12,350,   £13,421,  £16,991, £17,989, £18,699, £20,495

    Overpayments suspended and surplus cash currently being diverted to high interest savings.
  • Veteransaver
    Veteransaver Posts: 450 Forumite
    Name Dropper First Post
    @Veteransaver I have 10 years and 8 months, but will be paying off during and at the end of the fixed term (I have 4 years and 7 months left). One of the reasons I put this question out has made me realise there are so many options and further questions, and lots of different ways. I feel when using the overpayment calculator the lumpsum/reducing monthly payments is a very poor saving compared to keeping the same payments, its a shame Natwest dont allow this.
    But there's nothing to stop you from making a lump sum payment and then paying a separate monthly overpayment of the difference between the old and new payment is there? As long as you don't exceed the maximum 20% or whatever it is a year of course.


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